People have doubts about Buy-and-Hold. LOTS of people have doubts. But you don’t hear them express them very often.
If you were not paying very close attention, you might be led to believe that the Buy-and-Hold strategy enjoys near universal approval. That’s not even close to being so. But for so long as most of those who hold doubts fail to express them, people are going to come to that conclusion.
Which of course makes the problem worse. Because the primary reason why many people hold back from expressing their doubts is that they perceive the strategy as possessing near universal support. It’s dangerous to criticize strategies that enjoy near universal support.
Doubts About Buy-and-Hold
What I am saying is that Buy-and-Hold is popular because it is popular. But it is not nearly as popular as most people think. If everyone who held doubts worked up the courage to express their doubts, Buy-and-Hold could fall very hard very quickly.
There was a time when I played the game. Back in the late 1990s, I was putting together a plan for early retirement. I needed to know the safe withdrawal rate. I had heard Buy-and-Holders say that it is 4 percent. But something about that claim seemed a little fishy to me.
It hit me what the problem is when I read John Bogle’s book Common Sense on Mutual Funds. Bogle says in the book that reversion to the mean of stock prices is an “iron law” of stock investing. If that’s so, then it’s a logical impossibility that the safe withdrawal rate is the same number at all valuation levels.
The return obtained on stocks obviously affects the safe withdrawal rate that applies for a portfolio heavy on stocks. So, if high stock prices translate into lower stock returns, the safe withdrawal rate is lower when stock prices are high than it is when prices are moderate or low.
I made that point in a comment that I posted to a Motley Fool discussion board on the morning of May 13, 2002. A good number of people at that discussion board thanked me for launching the most important debate ever held at the board.
Which of course made me happy. But lots of others became angry that I had made a point that they were not able to refute but that upset their retirement plans in a serious way.
The study that I was challenging has not been corrected to this day. It’s public knowledge that the study is in error. But lots of people enjoy thinking that the safe withdrawal rate is always 4 percent. So lots of people who are often identified as “experts” continue to make that claim.
The safe withdrawal rate is not always 4 percent! It is not. Take my word.
It’s dangerous that those claims continue to be made. We haven’t seen retirements fail because of the false claims yet because stock prices have remained high for the past 21 years. But the high prices obviously cannot continue forever.
We could see a price crash this year or next year or the following year. When that happens, we will see the failed retirements, probably millions of them. Those people are going to be upset to learn that we knew all along that those retirement studies were in error and didn’t bother to inform them.
So I spend a lot of time trying to figure out what is going on. What happened is that Robert Shiller revolutionized our understanding of how stock investing works when he published his Nobel-prize-winning research showing that valuations affect long-term returns in 1981.
Prior to that (in the days when the Buy-and-Hold strategy was being developed), it was widely believed that the stock market was efficient. If that were so, rational investors would always set prices as close to where they should be as possible.
Shiller showed that that’s not how the market works. So the old understanding (under which market timing was not required) no longer applies.
Somehow we have to get the word out. The obvious thing would be just to talk about these matters at every site on the internet. However, that causes lots of angst. Stocks are today priced at nearly two times their fair value.
If we were to explore the far-reaching implications of Shiller’s research at every site, millions of investors would lower their stock allocation because the allocation they elected to go with when stocks offered a stronger long-term value proposition no longer applies.
The massive amount of selling would bring prices down for everyone. People grasp that on some level of consciousness. So there is a great deal of resistance to the idea of permitting a national debate to take place.
Still, we do need to get the word out. Delaying the debate will delay the price crash. But sooner or later we are still going to see one. When it comes, we should all want the sense of panic to be as limited as possible.
The greater the extent to which the crash comes as a surprise, the more panic there is going to be. So we should at least be getting the word out that there is good reason to believe that the Buy-and-Holders were wrong to think that market timing (price discipline!) is not always required.
I am suggesting that we all make an effort to speak with more courage on the dangers of Buy-and-Hold strategies. You are not going to win any popularity awards for doing that. You will be met with a lot of hostility if you tell the straight story.
But the more of us there are who speak out, the easier it becomes for all who have an inclination to do so to take that step. So I think you would be doing some serious good for the world if you gave public voice to any doubts you hold.
Rob’s bio is here.