March 15, 2009 Letters to the Editor
Updated: March 15, 2009.
Invest in Stocks Unless There Is A Strong Reason Not To Do So
I received this letter from Rob Bennett.
I was reading your article "Invest Early" and in particular this line:
"After all, we can be ahead by investing early if the bottom is several years off"
when a simple "rule" came into my head. The rule is: "Invest in stocks unless there is a strong reason not to do so."
Stocks usually offer the better long-term deal. So long-term investors should usually be invested in stocks. This is what the Passives got right (and it's no small thing).
Where they messed up is in failing to see that there are exceptions to the general rule. There ARE exceptions.
A problem that we are running into nowadays is that some are concluding that, since the Passives obviously messed up, they must have messed up on everything. They didn't. They got the general rule right. They just messed up re the exceptions.
It's easy to come up with scenarios under which it would turn out to have been better to have waited to invest in stocks. That doesn't mean that it is better to wait. Even if those scenarios come to pass, it will not mean that those who waited were right. It will mean that they were lucky. We know that those scenarios are possibilities. We don't know whether they are going to turn up or not. So we have to go with the probabilities.
The exceptions to the usual rule do not apply at today's valuation level. So the usual rule applies -- Invest in stocks.
As the sentence from your article quoted above indicates, there might be a short-term price to be paid for investing in stocks today. But stocks offer a big enough edge over the alternative asset classes that those following the usual rule are going to end up ahead of those who don't in the long term.
The key is balance, keeping both rules in your head at all times. Stocks are generally the best choice for the long-term investor AND there are exceptions to the general rule.
HERE IS MY RESPONSE
Thank you. You have made important observations.
I believe that there is something to be gained by Valuation Informed Indexing. It can cut down on the spread in long term returns in a balanced manner. It supports against the downside while removing only a little from the upside.
But this is a fine grain distinction at these valuations. Your basic rule applies: invest heavily in stocks today. I prefer to spread the deposits over three or four years.
It Might Be That There's A Strong Reason Today Not to Follow the Usual Rule
I received this follow up letter from Rob Bennett.
Thanks for your response.
In response to these two sentences
"Your basic rule applies: invest heavily in stocks today. I prefer to spread the deposits over three or four years."
I wanted to note that it may be that there is a strong reason today not to follow the usual rule (of investing heavily in stocks).
Robert Shiller certainly thinks so. He has said that he will not be investing in stocks until the P/E10 value drops below 10. And you are recommending that people spread deposits over three or four years.
It is certainly not my intent to suggest that this is bad advice.
I was just trying to put forward a "rule" that argues that stocks are usually the best long-term choice. I see the question of whether there is a strong reason today not to follow the usual rule as being a separate question.
It's true that I personally lean toward the view of Jeremy Grantham (who sees danger in waiting too long to get back into stocks) over the view of Shiller (who sees it as still being a bit early to get back into stocks). But I think that all these viewpoints are perfectly reasonable ones.
My point was just to say that stocks are generally the best choice. I feel a need to point this out because there are some who characterize those who take valuations into account as "bears." I find that sort of characterization extremely misleading. It is the same historical data that says that valuations always affect long-term returns that also says that stocks are generally the best choice for the long term.
There are exceptional circumstances that apply today. The question of whether those circumstances justify going with a stock allocation lower than one would ordinarily go with at a time when the P/E10 value is 12 is a judgment call. The more different points of view we hear re that one, the better, in my assessment.
HERE IS MY RESPONSE
Thank you. You have made an excellent point. There is the general rule and then there are refinements. It makes sense to stick with a high stock allocation in most circumstances.
In reference to individuals, I think that Jeremy Grantham has actually thought through the process and made studies while Professor Shiller has only reflected on the historical data. Just because P/E10 has fallen well below 10 in the past is no guarantee that it will today. My opinion is that it will, considering the effect of Governmental actions. But it remains prudent to account for the hidden flaw in any analysis. It is best to consider what to do if we are wrong. Easing into the stock market makes a whole lot of sense. Holding out for a specific P/E10 number is pushing our luck.
Addendum -- I Stated Things Poorly in the First Letter
I received another follow up letter from Rob Bennett.
After sending in my second letter on this topic, I reread the first letter. I said this:
"The exceptions to the usual rule do not apply at today's valuation level. So the usual rule applies -- Invest in stocks."
That's poorly stated.
From a numbers standpoint, the exceptions to the usual rule do not apply -- the P/E10 value is fine. But it's not only the numbers that matter. Shiller is urging caution because of factors other than the numbers. You are doing the same, but to a lesser extent. My view is close to your own.
I didn't mean to suggest that people should only look at the numbers. I don't think that at all.
My primary purpose was to point out how the Passives made a generally good point in arguing that stocks are the best choice for the long run. I think it is important that we try to give the Passives credit for the things they got right.
I apologize for causing confusion with the poor wording.
HERE IS MY RESPONSE
Thank you. You have made an important point. You have stated matters well.
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