There’s a price to be paid for lowering your stock allocation; stocks generally pay higher returns than other asset classes. So, if prices remain sky-high longer than they ever have in the past, the Valuation-Informed Indexer may find himself stuck earning a lower return for longer than he expected.
I believe that the Buy-and-Holders exaggerate the extent to which this is a reality. But I believe that it really is a reality to some extent. I would like to see research examining the question.
Examining Stock Investing Questions
What asset class is the best alternative to stocks? The Buy-and-Holders generally say that money not invested in stocks should be invested in bonds. I don’t feel comfortable with that choice. For so long as stocks are selling at reasonable prices, I like stocks best because they provide high returns. When prices rise too high, I want to be invested in an asset class that I can leave at the time when stock prices again become appealing.
So I like TIPS, IBonds and Certificates of Deposit as my stock alternatives. But it would be good to see research on this point from a researcher who did not permit a Buy-and-Hold bias to dominate his thinking on these matters.
Many investors who I have run into who are sympathetic to claims that stocks are not the best asset class when prices are out of control seek equity categories that are protected from the overvaluation problem. They might invest in value stocks or in international index funds or in high-dividend stocks.
I believe in keeping things simple and I don’t believe that the average investor possesses the skill set to make good choices along these lines. But the arguments that these people make are not without merit and lots of people can make good choices if they put some work into the project. I’d like to see more research into this question.
How often are stock allocation changes needed? My inclination is to check the CAPE level once a year. Dramatic changes in valuations are rare. So I believe that that is often enough. But I believe that the relentless promotion of the Buy-and-Hold strategy has pushed me into seeking to make allocation changes as infrequently as possible. So my mind is open on questions like this.
Should allocation changes only be made in response to big valuation shifts or is it better to make smaller shifts more frequently? I started out favoring the former approach but have come to believe over time that the latter approach may possess more theoretical validity.
To what extent does promoting Buy-and-Hold put dollar bills in the pockets of the experts who promote it? It doesn’t seem possible that we would see what we have seen if there were not a financial advantage associated with the promotion of Buy-and-Hold. But it seems to me that the economic stability we would see with a shift to research-based strategies would benefit everyone. Wouldn’t stocks be a more appealing asset class in a world in which returns were higher and risk was diminished?
Would returns on safe asset classes be higher in a world in which honest posting were permitted at every site? It seems to me that they would be. When the risk of stocks is reduced, the safer asset classes are going to have to offer better returns to attract buyers. Logic tells me that this is so. But I would feel more comfortable about the belief if there were something other than my own thought processes supporting it.
Was promotion of the Buy-and-Hold idea that valuations don’t matter the primary cause of The Great Depression? This is an important historical question. It has always seemed to me to be a huge coincidence that crazy stock prices and economic collapses are so strongly correlated. But it seems to be taboo in the economics profession to blame high stock prices for the Great Depression. I’d like to see rethinking of this matter reflected in some solid research.
How big of an economic surge should we expect from the economic stabilization that we would see from a shift to Valuation-Informed Indexing? My hunch is that it would be huge. It would be nice to have something more than one person’s hunch to point to when making the case for why we need to make that shift.
Are stocks really less risky than bonds? I have presented this case in earlier articles. If I am correct regarding this point alone, it justifies the 21 years of struggle I have dedicated to this cause. Can someone of influence please check out whether this thought of mine makes sense or not?
Is the CAPE the best valuation metric? I am sold. But, given how important it is to identify the best possible valuation metric, it would be better to do more research on this question.
How could portfolio statements be redesigned to provide the information on the effect of valuations needed for investors to gain a better sense of the true and lasting value of their portfolio? My thought is that there should be a line added that would report the valuation-adjusted numbers in a different color. But it may be that the sorts of people who specialize in design questions could offer some helpful suggestions here.
What percentage of experts in this field entertain doubts about the core Buy-and-Hold dogmas? My sense is that the number is high. All of the people who entertain doubts need to know that they are by no means alone. Knowing that their peers are with them will give them confidence to stand up and be counted.
Rob’s bio is here.
