I’ve written two articles at this site (The Shiller Revolution — The New Way to Invest and The Economy Doesn’t Drive the Stock Market, the Stock Market Drives the Economy) introducing you to Valuation-Informed Indexing, a model for understanding how stock investing works that I believe will replace the now-dominant Buy-and-Hold Model. The one difference between the two models is that, while Buy-and-Holders argue that there is no need to time the market, Valuation-Informed Indexers believe that investors must change their stock allocations in response to big shifts in valuation levels if they are to keep their risk levels roughly constant over time.
I’ve written extensively on Valuation-Informed Indexing over the past nine years. But I have never believed that the writings of one blogger could ever be enough to bring on the replacement of the Buy-and-Hold Model. We need lots of people (including confirmed Buy-and-Holders, to be sure) participating in discussions held all over the internet. My hope is that we will in the not too distant future all be participating in a national debate focused on the question of what the academic research really says about what works in stock investing.
In this article (and in Part Two, which I will post in two weeks), I want to point you to several bloggers who have done their part to contribute to the launching of such a debate. The links below are to articles discussing Valuation-Informed Indexing in an intelligent way (and in some cases to my responses to those articles). The bloggers who wrote these articles do not necessarily endorse Valuation-Informed Indexing or believe that Buy-and-Hold needs to be replaced. They believe that Valuation-Informed Indexing possesses enough potential appeal that we all should be comparing the two models and over time coming to reasoned conclusions as to what is the best path for the future.
1) Resistance Is Futile: Why Buy-and-Hold Beats Value Investing – Pop Economics
Juicy Excerpt #1: I couldn’t stick to my strategy. The market’s long periods of irrationality would break me down the same way the Borg broke down nearly every race it encountered.
Juicy Excerpt #2: Value strategies might work in the long-run, but they aren’t likely to work on your personal timeline.
2) The Risks of Buy-and-Hold Investing — Pop Economics
Juicy Excerpt #1: Say that you read a book titled “Driving for the Long Run” and became convinced as a result of the arguments set forth in it that the thing to do is always to remain at a single speed regardless of the driving conditions you faced in various circumstances.
Juicy Excerpt #2: Many of today’s investors think of Buy-and-Hold as a neutral choice…. No! The neutral choice is to remain at the same risk level at all times.
3) A Critique of Valuation-Informed Indexing -- Money and Such
Juicy Excerpt: It appears that adjusting the stock allocation for the Coffeehouse Portfolio in response to big price changes did not produce higher returns.
4) Passive Investing Is for Extremists: The Critique — Money and Such
Juicy Excerpt: Why make the assumption that investors will be better at predicting the long-term peaks and troughs in the market than they are able to predict short-term ones?
5) Why Long-Term Timing Works Even Though Short-Term Timing Doesn’t – Money and Such
Juicy Excerpt: Timing doesn’t work in the short term because short-term prices are not predictable. Why? Because stock prices are set by humans and humans are emotional creatures…. In the long term, stock prices must reflect the economic realities or the entire market will collapse.
6) Valuation-Informed Indexing vs. Passive Investing: Which Is Better? — My Personal Finance Journey
Juicy Excerpt: Passive investing outperforms Valuation-Informed Indexing in the past 20 years , but Valuation-Informed Indexing displays much less risk.