What Other Bloggers Think of Valuation-Informed Indexing — Part One

Posted: 15 Sep 2011 04:00 AM PDT

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.

Dollar Matters: Plutus Awards Edition, Part II

Posted: 14 Sep 2011 09:00 AM PDT

Last week, our roundup featured all Plutus Award nominees. However, there wasn’t room for all the nominees last week. So this week, the roundup will feature even more nominees. Plutus Awards season is in full swing, and it’s exciting to be one of the nominees. Indeed, many of the blogs I write for are nominees (including Financial Highway), as well as my own nomination as a Blog Contributor. So, if you haven’t yet voted, head on over. And enjoy these posts from Plutus finalists:

Protect Your Assets With Estate Planning

Boomer & Echo provides a great overview of estate planning. You might not want to think of your eventual death, but your family will be better off if you plan now.

Always Put Off Today…

THE Canadian Personal Finance Blog takes a look at procrastination. If you put things off now (including finance related things), you might have to take care of them at a time when it is most inopportune to do so.

How To Find A Fee-Only Financial Advisor

Money Smarts takes a look at what you need to do in order to find a good fee-only advisor. Helpful, practical hints on finding someone who can help you with your financial planning needs.

Sustainable Finances: Go Paperless

This is my first post over at Sustainable Personal Finance. It’s all about how you can go paperless with your finances.

Should You Pay Off Debt Before Having A Baby?

Bible Money Matters tackles an interesting debate. Should you have children when you have debt (other than a mortgage)? Or should you be debt free before you try? A great discussion.

Are Penny Auction Sites Legit?

Over at Christian Personal Finance, you can learn a little bit more about penny auctions. Find out about how they work — and whether they are a good idea for getting something truly cheap.

How to Sell a Car

There’s a lot out there about buying cars, but how do you sell a car? Faith and Finance offers some practical advice on how to sell your car.

5 Simple Ways To Take Advantage of Low Interest Rates

Since rates are so low right now, you should consider your financial strategy. Over at Faithful With A Few, you can read about 5 ways to improve your finances in a low rate environment.

Top 7 Tricks to Teaching Kids About Money

Cafe Tax takes a look at how you can help your kids learn about money. Get your kids started on the path to financial freedom.

Children offer tax breaks and tax fraud opportunities

Don’t Mess With Taxes takes a look at children and the tax implications. Sure, there are tax breaks associated with your little ones. But watch out: You don’t want to be fraudulent.

Homeless: Final Thoughts

JoeTaxpayer offers this interesting and thought provoking end to a great series on homelessness — and the experience of being homeless. I think the whole series is worth a read.

Johnston: Economic Nonsense Posing as Wisdom

TaxProf Blog offers this snippet about economics, jobs, and government spending. An interesting read about what politicians say — even when they don’t know much about the subject.

Deal Blog Nominees

If you are into deals, you can check out these Plutus Awards finalists in the Best Deals and Bargains Blog category:

Life Insurance Blog