Is There a Better Way to Allocate Stocks than Buy & Hold??


CNBC, Market Watch, Forbes, Kiplinger, Wall Street Journal, CNN Money, The Street, Mark Cuban and others say that buy and hold is dead.

Lubos Pastor of the University of Chicago Booth School of Business and his colleagues have recently documented that buy and hold may never have been a viable investment strategy.

Wall Street Journal columnist Brett Arends wrote in 2010:

For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go…. It’s hooey…. They’re leaving out more than half the story.

Leading economist Robert Shiller strongly hinted at this possibility in research which he published 30 years ago.

As attorney, tax expert and financial writer Rob Bennett told us:

The story in brief is that Yale University Economics Professor Robert Shiller published research in 1981 that turns our understanding of how stock investing works on its head. Shiller’s findings let us all obtain far higher returns at greatly reduced risk. The problem is that, by the time Shiller published his research, many big names had already endorsed Buy-and-Hold (which was based on research discredited by Shiller). So the big shots in the field have been ignoring and then even covering up Shiller’s findings for 30 years now.

The thing that I have done that no one before me has done is to explain the
practical IMPLICATIONS of Shiller’s findings. Even Shiller has never done this.

Shiller’s book (“Irrational Exuberance”) is fantastic, but it is all theory. He never tells investors WHAT TO DO. He has explained why in public interviews. He has said that he would be branded “unprofessional” by the experts in this field if he were to do so.

Shiller and many others have been keeping their mouths shut about the practical implications of his theory for three decades now.

Wall Street Journal’s Arends explained:

Consider the data from Professor Robert Shiller at Yale University. He tracks something known as the “Cyclically-Adjusted Price-to-Earnings Ratio.” (These days it is also known as “the Shiller PE”). This compares stock prices with after-tax company earnings, but only after adjusting those earnings to take account of the fluctuations of the economic cycle. This helps avoid the distortions commonly found when you compare stock prices to a single year’s earnings.

At the peak of a boom, earnings are artificially inflated, while at the trough they are artificially depressed. The Shiller PE smooths that out.


Can’t time the market? It was clear as a bell that investors should have gotten out of stocks in 1929, in the mid-1960s, and 10 years ago. Anyone who followed the numbers would have avoided the disaster of the 1929 crash, the 1970s or the past lost decade on Wall Street. Why didn’t more people do so? Doubtless they all had their reasons. But I wonder how many stayed fully invested because their brokers told them “You can’t time the market.”

Bennett’s website provides endorsements for his stock timing theories, and argues that the prevailing buy and hold dogma helped to cause the financial crisis:

The story is that the true cause of the economic crisis was the reckless promotion of Buy-and-Hold Investing for 30 years after the academic research showed that there is zero chance that it can ever work in the long term.


The short form of the story is that the stock market was overvalued by $12 trillion in 2000. This is public information. All in the field acknowledge that stock prices over time revert to the mean (John Bogle calls this an “Iron Law” of stock investing). So those who were paying attention to valuations knew in 2000 that within 10 years or so close to $12 trillion of spending power would disappear from our consumer economy. An economic crisis became inevitable once we permitted stock prices to rise so high. We should tell people to lower their stock allocations when prices rise to insanely high levels both to protect their own retirements and to protect the general economy from collapse. We should encourage Valuation-Informed Indexing, described in a Guest Blog Entry I wrote for the Free From Broke site titled A Better and Less Risky Way to Invest in Stocks.


Dallas Morning News Columnist Scott Burns spilled the beans in a June 2005 column he wrote about my showing that the numbers used by most financial planners to help us plan our retirements are wildly wrong. Burns observed that the reason why we see few media reports about the errors in the retirement studies even though they will cause millions of middle-class people to suffer failed retirements in days to come if they are not corrected is that: “It is information most people don’t want to hear.” The “experts” (who see themselves as being in the business of selling stocks, not of giving independent and accurate investing advice) encourage us to follow dangerous strategies, and, once we do so, we become so emotionally invested in the strategies that we become hostile to hearing the realities.

Many big names have seen the merit of the new investing ideas. Carl Richards, owner of Clearwater Asset Management and author of the Behavior Gap blog, told me: “I have read everything I can about Valuation-Informed Indexing, and I agree with you that Buy-and-Hold Passive Investing is extremely problematic… I value and respect the passion, hard work and research that you have put into this very important issue…. I think what you are doing has huge value.” Rahiv Sethie, a professor of economics at Barnard College, Columbia University said of me: ”Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy than Passive Investing over long horizons (ten years or more). I am not in a position to evaluate this empirically but it is consistent with Shiller’s analysis and I can see how it could be true.” Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, researched the question and learned that “Valuation-Informed Indexing provides more wealth for 102 of the 110 30-year periods” in the historical record. Bill Schultheis, author of The New Coffeehouse Portfolio exclaimed upon discovery of my web site: “Holy Toledo! This is great stuff!”

A calculator at my site called The Stock-Return Predictor will let you see with numbers why Buy-and-Hold is so dangerous. The calculator runs a regression analysis of the historical stock-return data to show the most likely 10-year annualized return starting from any of the various possible starting-point valuation levels. In 1982, the most likely 10-year annualized return was 15 percent real. In 2000, it was a negative 1 percent real. Given that the value proposition of stocks changes dramatically with big price changes, there is obviously no one stock allocation that can work for any investor at all times. Investors need tools like this to learn when they need to change their allocations.

I don’t think it should be too hard to understand why The Stock-Selling Industry desperately wants to keep tools like this out of the hands of middle-class investors. All industries would like their customers to believe that their product is worth buying at any possible price. But when too many become convinced that Buy-and-Hold can work, the insane level of overvaluation that follows causes an economic crisis (this has happened four times in U.S. history now — we have not since 1900 had an economic crisis that was not preceded by a time of insane stock overvaluation and we have not had a time of insane overvaluation that did not produce an economic crisis). There comes a point when marketing considerations need to take a back seat to preservation of our free market economic system, which cannot survive if all middle-class investors see their retirement savings wiped out (the historical data shows that we are likely to see another 65 percent price drop from where we stand today in the event that stocks continue to perform in the future anything at all as they always have in the past).


The tool that is used by those informed about valuations to predict long-term returns (short-term returns cannot be predicted — it is true that short-term timing does not work) is “P/E10″. The P/E10 value is the price of the S&P index over the average of the last 10 years of earnings. Yale Economics Professor Robert Shiller (author of Irrational Exuberance) has been showing with research for 30 years now that P/E10 can be used to effectively predict long-term returns. Arends pointed out in an earlier article that: “This ratio [P/E10] has been a powerful predictor of long-term returns” and that “valuations is by far the most important issue for investors.”

A graphic that compares the Year 20 Annualized, Real, Total Return v. the P/E10 that applied on the day the index fund was purchased is here. The same graphic for 10 years out is here. A graphic comparing how investors following a Buy-and-Hold strategy would have fared over the entire historical record compared with those following a Valuation-Informed Indexing strategy is here. Norbert Schenkler, the financial planner who prepared the graphic, concluded that: “The evidence is pretty incontrovertible. Valuation-Informed Indexing…is everywhere superior to Buy-and-Hold over 10-year periods.” The one exception found by Schenkler, the late 1990s, no longer applies since the onset of the stock crash (the graphic was prepared prior to the crash).

Shiller used the P/E10 tool to warn us of the economic crisis that began in 2008 in his book (published in March 2000). He said that in the event that stocks performed from 2000 forward as they always have in the past: ”The real losses could be comparable to the total destruction of all the schools in the country, or all the farms in the country, or possibly even all the homes in the country.”

I’ve collected a number of quotes from leading experts in the field who have expressed grave doubts about Buy-and-Hold here. I’ve collected 20 studies showing that valuations affect long-term returns and that thus Buy-and-Hold can never work in the long term here. If you prefer taking in information by listening rather than by reading, I have recorded 200 podcasts addressing various aspects of the question. They are available for downloading here. I post updates on developments relating to this story daily at my twitter feed here.

Check out Bennett’s stock market valuation calculator.

Note: We are not investment advisers, and lack the experience and historical knowledge of securities returns to be able to comment on Bennett’s system.

We encourage investors to judge for themselves.


Category: Investing, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Buy and Hold Is Dead (And Never Worked in the 1st Place)”

  1. wcvarones says:

    Why are the 30-year returns always higher than the 40-year returns in this guy’s calculator? Something goofy there.


    BR: Perhaps the past decade (2000-2012) of zero returns has something to do with it . . .

  2. Rob Bennett says:

    Why are the 30-year returns always higher than the 40-year returns in this guy’s calculator?

    Thanks for your question, which of course is a perfectly reasonable one, WC.

    My guess is that this is just a quirk of the data set. We only have 140 years of return data available to us. It seems to me that a limited data set might produce results with a few quirks of this nature. My expectation is that, as the data set grows, the quirks will diminish or disappear.

    The name of the fellow who did the numbers work on the Return Predictor is John Walter Russell. John died in October 2009. But I have continued to pay the hosting costs for his web site, so that interested parties can look it over (I have never added or subtracted material to or from the site — it is all as John left it).

    Those with a particular interest in the numbers side of all this may also want to check out Wade Pfau’s research. Wade Pfau holds a Ph.D. from Princeton. He is an Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan. After studying this matter in depth, he concluded that: “On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks Buy-and-Hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”

    Wade came close to completion on a follow-up paper that is today not publicly available. He said: “I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.” I know that Wade would be thrilled to find a journal to publish that paper if he were offered a bit of encouragement.

    If you travel to the bottom of the URL below, you will see comments that Wade made to me during our 16 months of e-mail correspondence on a variety of questions that he examined in his research. Wade was left with no doubt whatsoever in his mind that “Yes, Virginia, Valuation-Informed Indexing works!”


  3. wcvarones says:

    >> BR: Perhaps the past decade (2000-2012) of zero returns has something to do with it . . .

    That was my suspicion, too, but it doesn’t hold true for other time periods (e.g. 40-years over 50-years).

    It does point out that this is a very small sample to make predictions from.

    And I’d be cautious in using history from an outstanding 100+ years (see Jorion & Goetzman, 1999) to project returns in a peak debt, QE-infinity world.

  4. [...] The Big Picture Blog Reports on Wade Pfau’s Research Showing the Superiority of Valuation-Informed Indexing Over Buy-and-Hold Published in November 19th, 2012 Posted by Rob in economic crisis, Investing Basics, Investing Strategy, investing theory, P/E10, Passive Investing, Rob Bennett, Value Indexing The Big Picture blog early this morning posted an article reporting on Academic Researcher Wade Pfau’s research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold. The report is titled: Buy-and-Hold is Dead (and Never Worked in the First Place). [...]

  5. Rob Bennett says:

    [i]It does point out that this is a very small sample to make predictions from.[/i]

    This is a critically important point, WC.

    But we are all working from the same database. Can we have any more confidence in the claims that long-term timing doesn’t work than we have in those that it is essential? The 140 years of return data available to us shows that long-term timing always works and is required. There is ZERO data showing that it does not work or is not required. What belief should we go with in those circumstances? Please keep in mind that, if long-term timing really is required and we fail to let people know that, our failure to encourage long-term timing will bring on an economic crisis.

    I certainly do not think that all the people who sincerely believe that long-term timing does not work (there are obviously millions of smart and good people in this category) should change their minds overnight. It would be insane to expect that to happen. What I say is that we all should acknowledge that at the very least this is an open question that should be widely discussed.

    We learn by sharing information with each other and talking things over. The question of whether long-term timing works has become taboo in the Buy-and-Hold Era. That’s what needs to change. Once that changes, we will figure out together how to move forward and we will be far better informed because we will be hearing the sincere views of all knowledgeable people in the field. Today, those who believe in long-term timing are afraid to speak up. That’s a horrible, horrible, horrible state of affairs, in my assessment.

    One of the members of one of the peer review committees that considered Wade’s research said: “To me, the elephant-in-the-room question is: what is the ultimate criterion for one to conclude with confidence that one strategy is better than the other?” How will we ever know the answer to that question until we permit (and even encourage!) full and free discussion of the pros and cons of both strategies?

    Discussion needs to come first. Only after we have full and free discussions can be begin to form tentative conclusions one way or the other.


  6. The nagging issue for most investors is that market timing is not easy. To become a good market timer, as with any endeavor in life, takes lot’s of dedicated effort. Most tempted to abandon buy and hold, would undergo horrifying losses when attempting to become market timers. Market timing looks easy on the surface and with the benefit of hindsight.

    Furthermore, even assuming the investor has the appropriate skills, in real time market timing is painful because it forces the investor to part with open positions. Few investors have the stomach to stick to a market-timing strategy. Second guessing will eventually prevail.

    Furthermore, if all investors became market timers, most of the advantage gained by being a market timer would be lost. This is particularly true when the cake is shrinking as it is now.

    As with any walk of life, the majority tends to lose, and profits gravitate towards the minority. This is why good market timing and the stomach to stick to it will always remain in short supply.


  7. wcvarones says:

    Can we have any more confidence in the claims that long-term timing doesn’t work than we have in those that it is essential? The 140 years of return data available to us shows that long-term timing always works and is required. There is ZERO data showing that it does not work or is not required. What belief should we go with in those circumstances?

    Agreed. Valuation timing makes theoretical sense and seems to be borne out by the limited empirical data.

    As for the current environment with a fairly high Shiller PE, I’m going to stay invested in stocks because bonds are yielding zero and Bernanke is promising to slaughter anyone who stays in cash.

  8. Rob Bennett says:

    The nagging issue for most investors is that market timing is not easy.

    I know that many good and smart people strongly believe this to be so, Dow Theorist. My take is that people may be drawing conclusions about long-term market timing based on their experiences with short-term market timing. I view them as being very, very different things.

    I believe that long-term market timing is the only emotionally balanced approach. The investor who follows a long-term market timing strategy quickly becomes indifferent to price changes. When prices go up, he sees it as a plus because his portfolio is larger and as a negative because the long-term return going forward is now lower. When prices go down, he sees it as a negative that his portfolio is smaller and as a positive that the long-term return going forward is now greater.

    I think it would be a good thing if investors became indifferent to price changes. I think this is the change we need to get millions of investors to develop a true focus on the long-term for the first time in investing history.

    And please understand that we are talking about a tiny number of allocation shifts. The research shows that investors can achieve a huge increase in long-term returns and a huge reduction in risk by being willing to make only one allocation change every 10 years or so on average. From 1982 forward, only one change was required. Investors needed to lower their stock allocations when prices reached insanely dangerous levels in 1996. Following the next price crash, another allocation shift will be needed.


  9. [...] The Big Picture Blog recently posted a lengthy article (“Buy-and-Hold Is Dead — And Never Worked in the First Place”) telling the story of my ten years of work developing the Valuation-Informed Indexing concept with [...]