The Good Side Of Buy-And-Hold

The Good Side Of Buy-And-Hold

I am not a Buy-and-Holder. I once was. I wrote a post to a discussion board on May 13, 2002, pointing out that the Buy-and-Hold retirement studies lack adjustments for the valuation level that applies on the day the retirement begins and the reaction of my Buy-and-Hold friends to that one convinced me that Robert Shiller is right that stock investing is a highly emotional endeavor and I moved on.

But there’s still a lot that I like about Buy-and-Hold.

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One thing is those safe withdrawal rate studies. The Buy-and-Holders say that the safe withdrawal rate is always 4 percent. That can’t be. Robert Shiller showed in 1981 that valuations affect long-term returns. If that’s so, then it is a logical impossibility that the safe withdrawal rate is the same at all valuation levels. I would like to see those studies corrected. That said, the Buy-and-Hold retirement studies advanced our knowledge of retirement planning in a big way.

Before those studies came out, lots of smart people (including Peter Lynch) thought that the safe withdrawal rate was 6.5 percent real because that’s the average long-term return generated by U.S. stocks. That sounds plausible enough, doesn’t it? If stocks are increasing in value by 6.5 percent per year, retirees should be able to take that amount out of their portfolio to cover living expenses and not have to worry about depletion of capital. It was the Buy-and-Holders who showed us that the sequence of returns that generates the 6.5 percent return makes a big difference. A sequence in which there are small returns in the early years supports only a lower withdrawal rate because such a sequence does not provide as much in the way of compounding benefits. I believe that the Buy-and-Hold studies are in error but also that they helped people. It is possible for both things to be true.

The thing that I like most about Buy-and-Hold is that it is the first investment strategy that at least purports to be rooted in science. The big problem in this field is that there is so much money to be made that people who work in the field are tempted to permit marketing considerations have too much influence over the advice they offer. The Buy-and-Holders showed us the way out of that trap by arguing that investment strategies should be rooted in peer-reviewed research. I fault them for not acknowledging Shiller’s “revolutionary” (his word) research from 1981 forward. But we need to give the Buy-and-Holders credit for making the case that peer-reviewed research matters. At least they have prepped the field for the acceptance of better approaches down the line a bit.

I love it that the Buy-and-Holders urge us to tune out the noise. Most coverage of the ups and downs of the stock market is noise. Investors need to be warned not to let it distract them from their long-term plan. Unfortunately, the Buy-and-Holders are not able to appreciate that returns of greater than 6.5 percent real (the return supported by economic growth) are so much noise. Irrational exuberance is noise.

I also love it that the Buy-and-Holders advise investors to Stay the Course. Again, I question whether the Buy-and-Holders possess a sure understanding of what the phrase entails. In the minds of the Buy-and-Holders, an investor is staying the course if he sticks to the same stock allocation at all times. If valuations affect long-term returns, risk is greater at times of high prices and investors seeking to maintain the same risk profile at all times must adjust their stock allocations in response to big valuation shifts. It is the investors who practice long-term timing (price discipline) who are Staying the Course in a meaningful way. But it is the Buy-and-Holders who popularized the idea of Staying the Course in the first place. That’s was a major contribution.

I like it that the Buy-and-Holders are pro-stock. Stocks are the best asset class for the typical middle-class investor. The Buy-and-Holders have done a lot to spread the word. They undo a lot of their good work when they suggest that stocks are such a good asset class that there is no price at which they are not a good buy. That idea is flat-out silly. Still, I like it that many people have learned to love stocks by listening to the arguments of our Buy-and-Hold friends.

Buy-and-Holders generally seek to keep fees low. That can be a big plus. Investors don’t have control over many aspects of the stock investing project. They do have control over how much of their possible return gets eaten up in fees. Those who follow the advice of the Buy-and-Holders generally pay lower fees and that means that they keep more of the returns generated by their holdings than do stock investors following other strategies,

Indexing is a breakthrough concept. Indexing reduces risk through diversification while still delivering plenty-good-enough returns. What’s the downside? We owe the development and promotion of indexing to our Buy-and-Hold friends. We should be grateful for their efforts in this respect.

Buy-and-Hold is not perfect. It is a gravely flawed strategy because it fails to take valuations into consideration in the advice it offers. The valuation level that applies when a stock purchase is made is often the most significant factor determining the return ultimately obtained from that purchase. But the Buy-and-Holders got a lot of things right too and those of us who have made it a practice to point out the strategy’s weaknesses should make an effort not to forget all the good that it has done.

Rob’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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  1. There’s been more than one such web site created over the course of the 17 years in which I have writing about this stuff, Sammy. That much is true enough.

    More people would be saying what I am saying if that were not the case. I think that web sites of that nature hurt us all. I think that all of us, including all Buy-and-Holders, should be speaking up in opposition to that sort of thing. Because that sort of thing causes people who have doubts about Buy-and-Hold to self-censor themselves.

    I was a Buy-and-Holder myself once upon a time. It was when I saw things like that that I lost confidence in the strategy. Shiller’s big insight is that investors are not purely rational but are capable of acting emotionally. When I saw things like that, it persuaded me that Shiller was onto something.

    My best and warmest wishes to you and yours.


  2. And that is the core of the problem. People can read the link and see that there is no death threat or even a mention of you. The fact that people had to spend time to even research as to the accuracy is unbelievable. You think nothing about false allegations.

  3. I’m not making things up, Sammy.

    I exchanged scores and scores of e-mails with Wade during the 16 months in which we were working together. I have posted the texts of most of them at my web site. He was like a kid in a candy store in the days when he was learning about Valuation-Informed Indexing and getting increasingly excited about it while he researched the subject deeper and deeper and found that it all checks out. And then he was threatened. And then he wrote to me that he was afraid of what would happen to his career if he continued down the road he was on and told me that he was going to pull back. And then he took down from his web site all of the articles that he has posted there about the work that we had done together.

    That doesn’t just hurt me. It hurts every investor alive. We all need to know about the far-reaching implications of Shiller’s work. And the way we learn is by having researchers like Wade put their energies into helping us all out. If we threaten them into not doing that, we are only hurting ourselves in the end. We are better of learning the realities.

    It is not only Wade that this has happened to. I have seen dozens of similar situations play out. Rob Arnott wrote to me to tell me that he knows of researchers who were doing work on his ideas who were taken aside and told that they would be doing harm to their careers to publish that research. That’s the same thing. Shiller says in his book that he was told by a television producer just before an interview went on the air that he had better be careful what he said or he could cause stock prices to fall. That’s not an effort to get him to say precisely what he believes about the subject, is it? It’s an effort to keep stock prices high, which is something very different.

    This sort of thing is going on all the time to all sorts of people. Everyone cheers increases in stock prices and few cheer those who warn of the dangers of unjustified price increases. So the market cannot work in the way that markets are supposed to work. For the market to get the price right, there needs to be a battle between the side arguing for higher prices (the sellers) and the side arguing for lower prices (the buyers). The job of the market is to resolve the tensions between sellers and buyers and thereby to set the price properly. There is little such tension in the stock market. 90 percent of the population wants higher prices and those arguing that prices should be lower (those who believe that Shiller’s research is legitimate) are silenced. The price gets so far out of whack that eventually we see a price crash that hurts everybody.

    I believe that we need to see more discussion of Shiller’s ideas. I believe that permitting more discussion of his ideas would provide more balance to the market and thereby benefit us all. But that obviously means criticizing Buy-and-Hold. Buy-and-Holders deny that there is ever a reason to lower one’s stock allocation They believe in complete price indifference. It is my view that that approach defies common sense (as well as 38 years of peer-reviewed research).

    Your hostility to me and to Wade during the time that he was working with me is rooted in your hostility to Shiller’s ideas. Wade felt (quite understandably) that his career was at risk if he continued down the road that he was travelling when he worked with me, so he got off of that road. He was proud of the work that we were doing and he admired my work. He said so scores and scores of times. But he did not want to see his career damaged and so he chose a different course. I think that he made a tragic choice. I don’t think that any researcher should ever have to worry about such things. I see it as a serious imbalance in our system that needs to be corrected.

    The research that Wade and I did is scary to Buy-and-Holders. I get that loud and clear. It is SUPPOSED to be scary to Buy-and-Holders. We didn’t publish that research to support Buy-and-Hold, we published it is show the dangers of Buy-and-Hold. As a Buy-and-Holder, that’s good for you. You need to know the weaknesses of your strategy. If you choose to stick with Buy-and-Hold despite what Wade and I said, that’s fine. But you should let each investor make that choice for himself or herself. It is only by seeing the research that people can make informed decisions.

    It’s the things that you don’t know that hurt you as an investor, Sammy. You should want to know as much as you can possibly know. People who publish research that shakes you up are your friends, not your enemies.

    I am your friend. I know that you do not see it that way. But it is 100 percent my intent to help you (as well as many others, to be sure) out.


  4. These websites exist because of what you have said. Let’s take just one example. You have continued to tell everyone that there have been death threats against you and your family. I see by a recent post at your website that it was all made up. The link posted on your website is referring to a conversation people were having on home safety/protection, including closing comments around firearm safety. There is not one single death threat in that entire link, nor is there even any reference to you. This is a continual pattern with you. You just make things up.

  5. Yes, you make stuff up and you are a prolific liar. In fact, a group of people created a website just to track all of the things you have made up and lied about. Your response is alway how all these masses of people are wrong and how you alone are right. Just look at the results.

  6. It is true that Wade does not speak to me today. That makes me very sad.

    It should not be that way. He should be able to do the research that he believes will do the most to advance knowledge in this field and not have to worry that he will be made to pay a price if he does so. We will all be living better lives when all researchers feel free to do their best work.


  7. It is true that Wade does not speak to me today. That makes me very sad.

    It should not be that way. He should be able to do the research that he believes will do the most to advance knowledge in this field and not have to worry that he will be made to pay a price if he does so. We will all be living better lives when all researchers feel free to do their best work.


  8. The days in which Wade worked with me on the peer-reviewed research that we co-authored were the happiest days of his life. He wrote to me on dozens of occasions telling me how exited he was by our findings. This was what he has trained his entire life to do. And I of course know how he felt. I trained all my life to do the work that I have been doing. So I was excited too. And I of course remain so.

    The difference is that I stuck with the project when I was threatened and Wade jumped ship. In ordinary circumstances, he would not be upset with me. He would be upset with the people who threatened him and with the people who did not jump up to protect him. We are obviously not dealing with ordinary circumstances.

    The irony here is that the entire problem is that Shiller’s advance is just too darn big. The Buy-and-Holders did lots of wonderful things. But they did not get it all right. They made mistakes, as all humans do from time to time. And now the mistakes have been covered up for so long that it would be super embarrassing for them for people to learn the realities. So those of us arguing for the launching of a national debate are facing a huge headwind of resistance.

    We all want the same things, Sammy. We all want to learn how to invest effectively. When we all get to the other side together, no one is going to be looking back and saying “oh, I just wish that the cover-up had gone on a bit longer.” The only way to get to the good stuff is for us all to work up the courage to express our sincere views and to encourage all others to do the same. I am 100 percent sure that Wade and I will be the best of friends again when we all make it to the other side.

    I wish you all the best that life has to offer a person.


  9. Okay, Sammy.

    I do wish you all good things, in any event.

    And I love Wade Pfau in the same way that I love John Bogle. The 16 months that Wade and I spent working together on our peer-reviewed research was a blast. I miss the buy. I believe that we will be working together again in the days following the next price crash. I sure hope so.


  10. We have seen plenty, Rob. Wade talked about the damage you caused him and now he won’t speak to you. That tells us all we need to know.

  11. Rob,

    Again you demonstrate that you are the only con-man here. Readers can merely look at the example of Wade Pfau. Despite the way you twist his words, readers can look at the historical post to see what he has said about you as well as the fact that he will no longer speak to you due to the harm you have caused him.

  12. Yet again you try to sugar coat your words when you are called out for calling Bogle a con-man. Your market timing comments have all been refuted thousands of times. Wade Pfau even addressed that when referring to your mistakes in John Greaney’s work.

  13. I love John Bogle. I’m sorry if that sounds “flowery” to you. But that’s the way it is. I view myself as the biggest supporter that Bogle has ever had. Before he died, I was telling him that he should update Buy-and-Hold to reflect Shiller’s research findings. Had Bogle done that, Buy-and-Hold would work. I have a funny feeling that his intention starting out was to develop an investment strategy that worked. So I definitely feel that I was trying to help the guy out in a way that lots of people who call themselves his friend were not. Anyway, Bogle’s stuff is the tops. But he was wrong in his many suggestions that it is not necessary for investors to practice price discipline when buying stocks, in this fellow-s sincere view.

    Was Bogle a con man? in an important sense, he was. I wouldn’t say that he was a con man in every sense of the word. I think that if you had given Bogle a lie detector test and asked him if he thought that Buy-and-Hold was a good strategy, he would have answered “yes” and he would have passed the test. I think that he sincerely believed in Buy-and-Hod. But I think that he was conning himself into sticking with that belief for decades after Shiller published his research showing that valuations affect long-term returns. If valuations affect long-term returns, then stock investing risk is not stable but variable and investors seeking to keep their risk profile stable over time MUST lower their stock allocations when prices go to insanely high levels. Bogle didn’t want to think about that because it had a personal pride interest in not acknowledging that he was wrong in thinking that long-term timing is not required. So I think that he was conning himself and that his unwillingness to speak plainly about these matters hurt lots of people.

    I love the guy. I think he was the best. But it is true that I think of him as one of those darned flawed humans. He made many huge positive contributions. But he didn’t get them all right. And we insult him when we act as if his ideas are beyond criticism. That’s my sincere take, in any event.

    Bogle came close to endorsing Valuation-Informed Indexing before he died. He said that it made sense for investors to lower their stock allocations three times in the course of an investing lifetime because of valuations and to increase them three times in the course of an investing lifetime. That’s the concept. That made me very happy. I think that the only reason why he did not come out an make a full endorsement is that this issue has become so “controversial” that he felt that it would be too embarrassing to do so. I put much of the blame for that on the people who act as if Bogle is beyond ever making a mistake. We all make mistakes from time to time. When we suggest that Bogle is not human. we set him up for a big fall down the line. We end up hurting him. I find that very sad.

    Wade Pfau and I spent 16 months co-authoring research showing that Valuation-Informed Indexing has been FAR superior to Buy-and-Hold for as far back as we have good record of stock prices (that’s 150 years). It’s not only that market timing sometimes works. Market timing ALWAYS works. You just have to be sure that it is long-term timing that you are engaging in and not short-term timing (which really does not work — Thanks, John Bogle!).

    And that’s just what you would expect to find, is it not? Long-term market timing is price discipline. Is there any market in which price discipline does not always work? I sure cannot think of any. So why would anyone think that price discipline (long-term market timing!) would not work when buying stocks? It always works. We should be telling people that. It is the most important thing to know about stock investing. When we all feel free to spread the word of what the last 38 years of peer-reviewed research in this field tells us about how stock investing really works, we will all be a richer (in every sense of the word) people.

    Or so Rob Bennett sincerely believes, in any event, you know?

    My best wishes to you, Sammy.

    Flowery-Words Rob

  14. Spare us the flowery words about John Bogle. Upon the announcement of his passing, you still referred to him as the biggest con-man. There is no one, including you that has had a successful track record, based on outcomes, using market timing. Your own predictions of market crashes, including those made on this website have failed. If anyone would have followed your advice, they would have had a miserable financial outcome. When are you going to take responsibility for your own advice versus pointing fingers at others?

  15. I love Bogle. I rank him as the second most important investment analyst in history (second only to Robert Shiller).

    However, it is true that I believe that Bogle made a terrible mistake. Short-term timing really doesn’t work. The research backs Bogle up on that one. But long-term timing is price discipline. Price discipline is the key to making markets work. When Bogle discouraged investors from practicing long-term timing (price discipline), he hurt them in very serous ways. The error that Bogle made does not take away from his many hugely important contributions. But it is an error that needs to be acknowledged and corrected.

    I believe that we need to work together as a society to launch a national debate on the question of whether investors should be practicing price discipline (long-term market timing!) when buying stocks. It is my belief that this is 100 percent essential. If Shiller is right that valuations affect long-term returns, investors who fail to engage in long-term timing see their risk profile change dramatically when stock prices rise to the levels where they reside today.

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


  16. Imagine being a market timer. That is really taxing. Look at Rob Bennett, the author of this article. He has been peddling his VII concept for years. You can search out his failed retirement plan by doing a quick internet search. When it fell apart, he came up with a crazy story about these mysterious goons and how Jack Bogle was the biggest con-man to come along. He then said that John Bogle would help him collect $500 million in settlement payments (based on some delusions). Of course, Jack passed away not to long ago. Rob won’t admit the failure yet, but has now mentioned on his website that he will return to work at the end of this year or beginning of next year. Given that Rob has not worked for a regular paycheck since sometime in 2000 (about 19 years ago) and is now over the age of 60, it will not be an easy task.

  17. Just checking in, Rob. It looks like not much has changed with your posting and that you are still telling all the same lies. I did notice,however, that you have finally come to your senses on your retirement plan failure and that you will need to go back to work. Given that you are over 60 and haven’t worked in a very long time, it might be rough to find anything that pays more than minimum wage. I guess you should have listened to all those people that pointed out your errors so long ago and then you wouldn’t be in this position.

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