Valuation Informed Indexing

[Alchemisst]

Have been looking at this strategy lately, what are your thoughts?

The primary benefit of indexing is that it provides an easy means to achieve a high level of diversification at low cost. That’s a powerful benefit. Those who suggest that indexing is the only rational way to invest (this includes John Bogle, founder of the Indexing Revolution) discredit indexing in the long-term by trying to make indexing something that it can never be.

Indexing is not the only rational way to invest. Picking individual stocks or investing in mutual funds makes all the sense in the world for investors with the time and skill needed to succeed at those investing approaches. Indexing is a great option for those of us who are not yet well-informed on what it takes to pick stocks or funds effectively or who just do not have the time to engage in the research work required to do so.

There’s not a thing wrong with being a pure indexer your entire life.

The Valuation-Informed Indexer does not research stocks. He buys the S&P index (or some other broad index). How then does he avoid the terrible returns that the market as a whole has always dished out in the wild bear markets that inevitably follow in the wake of wild bull markets? He lowers his stock allocation at times of high valuations, putting the money into super-safe asset classes like Treasury Inflation-Protected Securities (TIPS), IBonds, or certificates of deposit (CDs)

http://www.passionsaving.com/how-to-of-investing.html

http://www.early-retirement-planning-in ... uator.html

http://www.early-retirement-planning-in ... ictor.html

http://www.early-retirement-planning-in ... eturn.html

[Indexer]

The Valuation-Informed Indexer does not research stocks. He buys the S&P index (or some other broad index). How then does he avoid the terrible returns that the market as a whole has always dished out in the wild bear markets that inevitably follow in the wake of wild bull markets? He lowers his stock allocation at times of high valuations, putting the money into super-safe asset classes like Treasury Inflation-Protected Securities (TIPS), IBonds, or certificates of deposit (CDs)

Valuation informed investor = fancy way of saying 'tactical allocation.' This is nothing new. The idea is at least 30ish years old. It's great in theory, but lacking in results.

He lowers his stock allocation at times of high valuations,

What counts as high valuations?  Most valuation metrics(PE, CAPE, TM/GDP, etc.) have been inflated for most of the past 20 years, at least compared to their long term averages. Many valuation metrics have been high even compared to post 2000 averages since around 2013, about the same time this article was written. Using this strategy at the time the article was written would have likely resulted in lower returns than sticking with run of the mill index funds. Given that valuations can stay elevated or depressed for decades they are not useful for market timing.


Side note: the website could use a lot of work. In addition, the political twitter feed in the bottom right isn't helping me take him seriously. I could care less about the guy's politics, but I find most of the content to be unprofessional.

[radram]

Indexing is not the only rational way to invest. Picking individual stocks or investing in mutual funds makes all the sense in the world for investors with the time and skill needed to succeed at those investing approaches. Indexing is a great option for those of us who are not yet well-informed on what it takes to pick stocks or funds effectively or who just do not have the time to engage in the research work required to do so.

How "experienced" is enough? An undergraduate degree in finance, a masters, a doctorate? When you buy a managed fund, that's who picked the stocks inside it. 80% of those do not match the index they are trying to exceed, and that is BEFORE fees. What "experience" should I get to do better than them?

What if I just want to buy the 20% that DO beat the market? What experience do I need to figure out which one is"the chosen fund" that is in the magic 20% that outperform? What about next year?

Want stocks with a lower P/E, Fine, buy a value index fund. Have they outperformed the S&P, I have no idea. Maybe. Will they keep doing it? How the hell should I know?

[Alchemisst]

Sorry the question is about valuation informed indexing, not stock picking.

[Boofinator]

Have been looking at this strategy lately, what are your thoughts?

Those who suggest that indexing is the only rational way to invest (this includes John Bogle, founder of the Indexing Revolution) discredit indexing in the long-term by trying to make indexing something that it can never be.

Can you show us exactly where Jack Bogle has suggested this? Otherwise, it's hard to be convincing if there is an obvious lie front-and-center. I'm not familiar with him stating as such, and on the contrary he's implied quite the opposite, that index funds would not work if everybody indexed.

[Telecaster]

I thought this shit would never die.

"Value Informed Indexing" was invented by two guys, Rob Bennett and John Russell.     Anyway, the idea was that if the stock market is highly valued you back off you stock allocation and stir in bonds, and if it is lowly valued, you exit bonds and amp up your stock allocation.

That sounds reasonable enough, right? 

But they never came up with a way you actually implement this strategy in real life.  They claimed you are  supposed to do it, but there were never any details, and you were a heretic if you expressed skepticism.   This problem was compounded by the fact that Rob Bennett is literally crazy.  Like full-on coo-coo for Coco-Puffs crazy.  He would always start off sounding reasonable, friendly, and personable and then go completely Chem-Trails nutso.    Bennett came up with all this stuff on Motely Fool, but got a lifetime ban.  So he moved to Morning Star, got a lifetime ban, moved to Early-Retirement  got banned, moved to Bogleheads got a lifetime ban.   And probably a few others I don't know about.  Bennett felt there was a buy and hold conspiracy that had been holding down his great ideas. 

He also had this weird fixation with celebrity financial gurus.   He struck up a correspondence with Wade Pfau along the lines of "starting valuations matter for retirement, and that's not being looked at."   Which is true, but then went completely off the rails claiming credit for Pfau's work, etc.  All this is on Bennett's website, by the way. 

But where it get really weird is John Bogle.   The king of buy and hold conspiracy was John Bogle, so Bennett had plans to confront him at a Bogleheads convention and out him as the impostor and enemy of the investor that Bogle represents.   I think that might be why he got banned. :) 

Long story short, yes I've looked into it.  Unless you are bipolar, don't look into it yourself. 

[flipboard]

"Value Informed Indexing" was invented by two guys, Rob Bennett and John Russell.     Anyway, the idea was that if the stock market is highly valued you back off you stock allocation and stir in bonds, and if it is lowly valued, you exit bonds and amp up your stock allocation.

That sounds reasonable enough, right? 

But they never came up with a way you actually implement this strategy in real life.  [... snip...]

Value Averaging (book by Michael Edleson, and recommended by people like Bernstein) essentially implements valuation based investing.

It actually isn't particularly complex to understand, but requires some good record keeping to implement. The numbers speak for themselves, although the actual performance improvement (long-term) is on the order of half a percent.

[Telecaster]

"Value Informed Indexing" was invented by two guys, Rob Bennett and John Russell.     Anyway, the idea was that if the stock market is highly valued you back off you stock allocation and stir in bonds, and if it is lowly valued, you exit bonds and amp up your stock allocation.

That sounds reasonable enough, right? 

But they never came up with a way you actually implement this strategy in real life.  [... snip...]

Value Averaging (book by Michael Edleson, and recommended by people like Bernstein) essentially implements valuation based investing.

It actually isn't particularly complex to understand, but requires some good record keeping to implement. The numbers speak for themselves, although the actual performance improvement (long-term) is on the order of half a percent.

That's not what these guys were talking about though.  Bennett claimed he had a strategy to move in and out of the market based on P/E.  But as far as I know they never came up with a formula with how it is supposed to work.   Bennett would post on Bogleheads (for example) saying stuff like "Buy and hold is dangerous!  You are doing it all wrong!"  So people would say "Okay how do you do it?"  And  he would never say how.  Finally, the admins would get sick him and boot him.  Then he'd start up again on another board.   Kinda surprised he hasn't hit MMM yet.  Maybe he is out of the business. 

[flipboard]

"Value Informed Indexing" was invented by two guys, Rob Bennett and John Russell.     Anyway, the idea was that if the stock market is highly valued you back off you stock allocation and stir in bonds, and if it is lowly valued, you exit bonds and amp up your stock allocation.

That sounds reasonable enough, right? 

But they never came up with a way you actually implement this strategy in real life.  [... snip...]

Value Averaging (book by Michael Edleson, and recommended by people like Bernstein) essentially implements valuation based investing.

It actually isn't particularly complex to understand, but requires some good record keeping to implement. The numbers speak for themselves, although the actual performance improvement (long-term) is on the order of half a percent.

That's not what these guys were talking about though.  Bennett claimed he had a strategy to move in and out of the market based on P/E.  But as far as I know they never came up with a formula with how it is supposed to work.   Bennett would post on Bogleheads (for example) saying stuff like "Buy and hold is dangerous!  You are doing it all wrong!"  So people would say "Okay how do you do it?"  And  he would never say how.  Finally, the admins would get sick him and boot him.  Then he'd start up again on another board.   Kinda surprised he hasn't hit MMM yet.  Maybe he is out of the business.

I've only read the quotations on "value informed indexing" that are in this thread - but they match my knowledge of value averaging: value averaging _does_ involve selling when valuations are super high, but only as a side-effect of a strict formula - which is equivalent to moving out of the market. (And before someone comes in to claim that you're giving away money to capital gains by doing this: cap. gains were factored in when evaluating value averaging, so even if you live in a country with capital gains, there has been a slight - but not huge -performance improvement to doing so.)

[CorpRaider]

I agree that there are rational ways to invest other than pure indexing.  The justification for these other ways is often going to be most strongly supported by the factoring in the psychology/behavior of individual implementing the strategy. 

I also agree this is just tactical asset allocation/timing.  Most people are going to lower their CAGR if they are allowed to make ad-hoc discretionary changes to their allocation. Probably easier/safer to set an AA and then just rebalance if it makes you more comfortable.

Portfolio visualizer does have data on a similar timing/tactical asset allocation methodology (based on valuations which allocates based on where the CAPE is within the bounds of historical observations).  You can look at the back-test data on there.  If memory serves it historically doesn't outperform 100% stocks, but lowers volatility.

Also, the blog allocate smartly tracks a bunch of AA models, if you're interested.