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Say that the following language was added to the top of the first page of the all Buy-and-Hold retirement studies (studies that identify the safe withdrawal rate as 4 percent without taking valuations into consideration):
“There are two schools of academic thought as to how the stock market works. The Buy-and-Hold model, which is the dominant model today, posits that the market is efficient. That means that investors are rational and take into consideration all factors affecting the price of stocks when setting the price of stocks. If that model is correct, market timing (changing one's stock allocation in response to big valuation shifts) is not needed and does not work.
“However, the Valuation-Informed Indexing Model, based on the Nobel-prize-winning research authored by Yale Economics Professor Robert Shiller, posits that investors are sometimes highly emotional and suffer from irrational exuberance in setting stock prices. If that model is correct, investors seeking to keep their risk profile stable over time MUST engage in market timing to do so. If that model is correct, market timing based on valuation shifts must produce higher risk-adjusted returns.
“The calculation of the safe withdrawal rate performed in this study is performed pursuant to the author's belief in the Buy-and-Hold Model. Calculations done pursuant to the Valuation-Informed Indexing Model would show higher safe withdrawal rates at time of low stock valuations and lower safe withdrawal rates at times of high stock valuations.”
View on buy-and-Hold retirement studies
What do you think?
I think that that language would solve the problem.
My personal view is that there should be no Buy-and-Hold retirement studies today, 42 years after Shiller published his Nobel-prize-winning research. But I of course understand that it would not be reasonable to expect everyone to shift to the new model within 10 minutes of the publication of the research discrediting the old one. People need to be persuaded to make the shift. They need to ask lots of questions. They need to ponder the responses that are given to their questions. They need to watch how people they respect reorient their thinking about these matters in light of the findings of the new research.
Those are all necessary steps that need to be taken as part of a transition from one model for understanding a subject to a new one and those steps can only be completed over months if not years of time. That's the only way that it has ever happened. That's the only way that it ever could happen.
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Given that that transition process has not yet taken place, I don't think it would be right to prohibit the publication of Buy-and-Hold retirement studies. But I strongly believe that language of the type set forth above should be required in any Buy-and-Hold study. If such language is provided and an investor uses such a study and suffers a failed retirement as a consequence, it seems to me that that investor was warned of that possibility. I don't think it is fraud if such a warning was given. I do believe that it is fraud if no such warning was given.
So it would be a plus for every single person involved for such warnings to be attached to all Buy-and-Hold studies. The investors would be made aware of the dangers of using retirement studies that do not include valuation adjustments. The authors of the studies would be protected from fraud claims. The Valuation-Informed Indexers would see more interest in their work from investors who read the warnings and elected to check out the case for the new model. And every investor on the planet would benefit from the national debate that would follow from the inclusion of that language in the studies.
A win all the way around.
The dangers of retirement studies
It's been 21 years since I pushed the“Send” button on my famous post pointing out the dangers of retirement studies that lack valuation adjustments and we don't see that language on a single Buy-and-Hold study to this day. Someone must see a downside.
The downside is that many of the investors who read that language would lose confidence in the Buy-and-Hold studies. Not all of them. Many investors love Buy-and-Hold and would skip over that language and would be perfectly happy using the 4 percent rule regardless of what that fool Shiller and that greater fool Bennett have to say about it. But many investors would lose confidence. And then those investors would tell their friends why they find the new model more persuasive and some of their friends would lose confidence too. The thing would snowball.
It's not just me who thinks it would play out like that. The Buy-and-Holders think that, at least on some level of consciousness. Otherwise, they would add that language to their studies. They don't add it because even the Buy-and-Holders have inner doubts about the merit of their model. They suspect that letting investors know that there is another model that seems to be more in tune with common sense (price discipline is required in every other market that exists) would in time lead to the collapse of the Buy-and-Hold Model.
Good, you know?
I have no problem with having a national debate. I think that would be super. But the fact that the Buy-and-Holders have not seen fit to make their case for 42 years now tells me that there is not much of a case to be made. I believe that there will be some sort of debate following the next price crash . There has to be a transition process and debate is part of it. But I believe that the behavior of the Buy-and-Holders over the past 21 years pretty much seals the fate of their strategy. Reasonable people are just not going to invest their retirement money pursuant to a strategy that its own promoters were not able or willing to defend for 21 years.
That language should be included in all Buy-and-Hold studies. I am not able to come up with any justification for failing to include such language in a Buy-and-Hold retirement study. Are you?
Rob's bio is here .
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