Taxable Investing: Where To Get Started?

One of the benefits of writing a blog, and attracting an audience, is that I get to learn from others much smarter than me on a variety of subjects. This is one such opportunity! I am interested in doing some taxable investing because we have maximized contributions to the various retirement accounts for which we are eligible.

Most of you are probably aware that I have an interest in reaching financial independence early, and “retiring” from the traditional nine-to-five grind to pursue other things. To accomplish this goal I recognize that I need to invest outside of retirement accounts to have access to “retirement” income before reaching typical retirement age.

My problem is I’m a bit overwhelmed by all the investment choices, and their various implications for things like risk, taxes, etc. I’m a fairly conservative person, by nature, so the idea of taking a lot of risk does not appeal to me. This is especially true of money outside of retirement accounts, because I recognize these funds will have a shorter lifespan than those socked away in retirement accounts.

To guarantee, strike that – guarantee is a bad word when talking investing. To improve my chances of securing pre-retirement income from some of this money, I’m aware of several techniques and investment vehicles:

  • Dividend investing
  • CDs and high-yield savings accounts
  • Treasuries
  • Bonds
  • Equities
  • Paid-for real estate
  • Some combination of all of the above

Obviously, things like taxes are one of the primary concerns when investing outside of retirement accounts. However, before I start comparing mutual fund turnover ratios at Morningstar, I need to settle on a basic strategy. Do I invest and reinvest dividends and earnings with the goal of creating the largest pile of money possible? Or, do I start to build a working capital fund that spins off dividends now that I use to supplement our lifestyle until they are large enough to live off without paid employment?

In the book Your Money or Your Life the authors advocate creating a working “cache” of money that spins off interest and dividends. Of course, this was easier to do in the 1990’s, when the book was first published, through the use of Treasuries. At the time they were yielding around 6.5%.

Unfortunately, this is no longer true, so someone seeking financial independence has to look elsewhere for higher rates (the revised edition of the book points to a couple LifeStrategy funds at Vanguard as potential candidates to house this cache of working capital).

I generally like this approach. I like the idea of knowing how much my investments are earning, and how much more we’ll need to cover our basic expenses. I do recognize, however, that by not reinvesting dividends I’m missing out on the opportunity to grow this savings balance even faster.

I’m interested to hear from others taking a similar approach to taxable investing, or planning to reach financial independence before the traditional retirement age. How are you investing your money? Do you reinvest dividends, or cash out now to supplement income? Anyone using rental income from real estate to help reach financial independence?


  1. With regards to retiring early… I’ve been practicing that lately..

    Being self employed I’ve decided to take a few months off… and work only 4 hours per day. I’ve been able to do that for a few years now.

    Retirement isn’t what it’s cracked up to be… you need to have hobbies in place, otherwise you’ll have alot of time on your hands…

    I would rephrase the term retirement to “having control over my time”. And… if you’ve got hobbies to keep you busy you need more money to spend.. in essence, retirement takes you from a making money work situation, to a spending money hobbie situation.

  2. Frugal Dad:

    I have explored the investing question in great depth. I have devoted the last seven years of my life to virtually nothing else. Even when I am not working on my site, I am thinking about what we have learned about investing in our discussions in the Retire Early and Indexing discussion-board communities. This has become pretty much a 24/7 reality for me (just as frugality had been for a number of years earlier — I was able to resign from corporate employment at the age of 43 after saving virtually nothing for the first 35 years of my life). The same was true for my partner, John Walter Russell (who built the site, until he died a few week ago (I can point you to scores of tributes to John put forward by those whose lives were enhanced by his research despite the tiny amount of publicity it has achieved thus far). John and I (and the hundreds of posters who have contributed in a constructive way to the discussions of the past seven years) have learned some amazing and wonderful things about how middle-class investors can invest far more effectively and far more safely than they ever have before.

    I would very much like to share with you and your readers what we have learned in a series of Guest Blog Entries at your site. If you would give me the word, I would start with a basic description of what we have learned works when investing in stocks (which really are the best asset class for the middle-class investor for those who know the simple but exceedingly controversial and rarely discussed rules of how to invest in stocks effectively) and why, and then respond to any and all questions directed to me. Then I would use the questions and comments put forward by your readers to prepare the next blog entry, going into a bit more detail on some aspect of the question of particular interest or concern.

    The basic thing that people need to learn is this: The conventional wisdom of the past 30 years (Buy-and-Hold Investing) is the one thing that you never, never, never want to follow. The people who came up with Buy-and-Hold are not dumb or evil. They made a mistake. The mistake was revealed by academic research published in 1981 and confirmed hundreds of times since. But those who have advocated Buy-and-Hold have destroyed so many lives with their mistaken advice that they are not able to acknowledge the mistake they have made. 90 percent of today’s investment “experts” are suffering from a cognitive dissonance that blocks them from learning what they need to learn to give effective advice. I of course understand that that’s an incredible reality. It also happens to be the truth. It is a truth that is documented by a wealth of materials available at my site and elsewhere on the internet.

    What works is to consider the price of the stocks you buy before buying them. That’s it. What works is the most common sense thing you can possibly imagine. The way to buy stocks is to buy stocks just the way you buy everything else that you buy. The Buy-and-Hold “idea” runs 100 percent contrary to this common-sense idea. Buy-and-Hold tells us that stocks are always best for the long run, that timing never works, that there is no need to change our stock allocations even when prices get to insanely dangerous levels. This is the most irresponsible investing advice imaginable. It has been tried four times in U.S. history and has led to a massive economic crisis each and every time. It is the reckless promotion of Buy-and-Hold for three decades after it was shown conclusively that it could never work for the long-run investor that is the primary cause of today’s economic crisis.

    I of course want to share what I have learned with all middle-class investors. The trouble that I have faced is that most sites that discuss investing are owned by people who think they know pretty much all there is to know about investing. They react in horror to learn that the historical data says to do precisely the opposite of what they have been doing and telling others to do for decades. They permit or participate in abusive posting to block their readers from learning the realities. Eventually, most ban honest posting on these questions. I believe strongly that things would be different at your site because of the humility you often evidence on investing questions and also because of the love you often evidence for your readers.

    If you were to permit discussion of these ideas at your blog, we could change the history of investing, Frugal Dad. Many bloggers of good will read your blog. If they were to come to understand the realities (it would take time but it would happen gradually as they were permitted to ask their questions in a non-hostile atmosphere and get good answers to them), they would spread the news. In time, we would have hundreds of blogs reporting the realities of stock investing and then even The Stock-Selling Industry would have no choice but to go along. These ideas would permit the typical middle-class investor to retire five years sooner if only he or she could learn about them.

    I hope you will give the idea some thought. I am of course happy to respond to any questions about it here or in an e-mail conversation. There is a ton of material at my site that you can use to check out what I am saying before agreeing to the idea. Or, if you want me to point you to the most important materials to save you some time looking through stuff, I am of course happy to do that.

    Please (I am begging) give the idea a little bit of thought. You are positioned to make an awful big difference in the lives of millions of middle-class investors. I sincerely believe that, if we could get the word out on these findings (which have been endorsed by a good number of big-name experts as well as by hundreds of my fellow community members), we could restore middle-class confidence in the markets and then in our economic and political system. We could bring this economic crisis to an end. All that we have to be willing to do is to permit a reasoned and civil discussion of the most important money issue of our time to go forward in a spirit aimed at promoting a learning experience for all concerned.


  3. I’m very interested in this topic…specifically because the historically conservative investments I used to use (CD’s, savings bonds, money markets) are all yielding next to nothing at the moment.

    Being conservative myself, I have enough nebulous investments in “the market” that literally can disappear again like they did a year ago.

    I like the idea of something more tangible like saving for a rental property. Or buying some farmland and planting trees that can be harvested as you need the money. Most tangible investments do require work, maintenance and research, though.

    Part of me wants to go back to basics. If the whole world went berzerk, what choices would have been the right ones? (Have some land that I can grow food on, and some stuff or skills that I can barter with?) History shows massive disasters pretty regularly. My mom grew up in WW2 and was born during the great depression..who’s to say that will not happen again in our lifetime? We’ve just been lucky so far.

    I shouldn’t have watched Life Free or Die Hard last’s tainted my post.

  4. I invest my ‘money’ in real estate, though there is a caveat to this statement. I was fortunate (or some may say ‘ignorant’) enough to start real estate investing before the housing bubble burst. I began in 2004, when it was pretty easy to get financing on rental property. Usually, only about 10% down was required. And if you were creative (crazy?) enough, you could borrow that 10% thru a Home Equity loan, a seller 2nd mortgage, or credit card cash advances. I employed the first two but not the last. Now 5 years later I’m within 1 year of paying off all of my “seconds” (i.e. the downpayments that I borrowed). It has worked for me, but I’ve put in a lot of time and effort to making it work. It isn’t passive investing at all and not for the faint of heart.
    I’m not sure if you can call this investing my money, since not a penny of my own went into the deals. But I did (and continue) to invest a lot of time. I unclog and install toilets, run wire for electrical circuits, cut grass, steam clean carpets, etc. Basically, if there is a maintenance issue I can handle, I do it myself. I started out not knowing how to unplug a p-trap below a sink, and most of my skills have come from trial and error, and error, and error. I also market thoroughly using free (or very inexpensive) advertising techniques. And I do my own tenant screening from taking calls to processing applications, pulling credit checks, calling employers, to finally signing the leases. This is school of hard-knocks real estate investing. I’ve invested my time more than anything to see that my plan is successful. I also do not take any money out of our rental accounts: it all goes back into improvements, property maintenance, and extra debt payments. Some days it really stinks because I feel like I’m working for free.
    The bright side? Using Dave Ramsey’s ‘debt snowball’ technique I pay off one loan, then roll that payment into extra principal payments on remaining loans. 13 years from today (18 years from when I began), all of my mortgages will be paid off and I’ll have income equal to my salary (gross) coming in. At that point, I can retire if I wish—100% debt free and earning enough rental income so I never have to work for a paycheck again. This is assuming “the Lord is willing and the creek don’t rise.”
    And as a side bonus, I used the skills I learned to tile my kitchen/dining room floor, saving myself $1500 of install labor. I also had the confidence to do much of the work finishing our basement. I estimate I saved around $4000 by doing all of my own drywall, trim, painting, running several electrical circuits and installing plumbing fixtures. For $7000, we increased the value of our home by almost $15,000 in today’s down real-estate market. Finished basements are a hot commodity where I live.

  5. I need to sum up. I do not think my path will work for most people. First, the real estate investment property climate has changed drastically from the time when I started. Loans on rentals are much more closely scrutinized, and down payments of 20% are the norm for fixed rate mortgages, which are what I have with one exception. Also, most times those funds must come from the primary borrower, not a seller second mortgage. Second, I had pretty much flawless credit: over 790, which is not normal for many folks. Third, the amount of time required dealing with rentals and tenants are beyond what the majority of would-be real estate investors would want to spend. Don’t believe the hoopla ‘guru’ books at your favorite bookstore are trying to push. If you really want some down-to-earth, no BS advice on real estate investing, try reading John T. Reed’s website and consider purchasing some of his books or the ones he recommends on his Real Estate guru rating page. Fourth, the place I live (MidWest) has very reasonable real estate pricing. We never ballooned like the coasts and haven’t fallen very far (5-10% drop). This makes it easier to forecast trends that could affect your long-term plans, and real estate is long term when you’re talking rentals (not fix ‘n flip).
    I do not mean to discourage anyone. Just be sure you conduct and honest evaluation of yourself, your skills, and your time available before getting into real estate. The rewards can be great (for me, retirement at age 47!), but so are the challenges.

  6. Your Money or Your Life came out with a newer edition recently that I just read. It’s been updated to go beyond just the treasuries.

    You might also want to check out Early Retirement Extreme – Jacob (the blogger) mainly uses dividends for his income, I think, and talks about his investing strategy in some of the posts. I actually started reading his blog before reading Your Money or Your Life.

  7. I’m in the same boat as you are on this one FD! It’s amazing the complexities that can present itself once a goal has been accomplished (aka being debt free). It’s nice to be able to have the retirement options fully funded!

    I’ve started to research my options for once I get my house paid off. There are so many choices, and I want the optimal mix.

    Whatever you decided, don’t put all of your eggs in one basket. Looks at all investments including those overseas. If I were you, I’d do the whole asset allocation portfolio based on the amount of risk you want to tolerate. Take a look at REITs too. Mix it up 😉

    Good luck! I hope to hear in a future post what you are considering soon!

  8. Oh boy. Good question, and it deserves a long answer.

    From most conservative to least conservative:

    1) I have a good portion of my money in an ING Direct savings account. This is liquid and easily accessible.

    2) I have about $25,000 in Lending Club. This is fairly liquid, thanks to their note trading platform, and earns just under 12%. This is a nice passive income source. I currently reinvest all the income I receive there (~$220/month)

    3) I have another 5 figures in the stock market. I invest only in individual stocks that pay dividends. There is a blog called Dividend Growth Investor that really helps with doing the research. I have everything from conservative (PG, MCD, KO) to high-growth/high-yield/high-risk (MPW; MWE). I take the time to individually research each company and I don’t spread myself too thin.

    4) I have 5 figures in gold bullion that I purchased when gold was $865/oz. I purchased via Monex.

    5) I invest in my own business as a source of passive income.

    Don’t overwhelm yourself with all of these. If I had to pick one place to invest money every month, it would be Lending Club. The stock market is pretty overvalued right now. Gold is on a tear and I don’t trust that it will keep skyrocketing. And your own business, while definitely worth forming, won’t take up a significant amount of money.


  9. FD,

    Since you need some growth, but you also don’t like risk, why don’t you try this:

    Invest your initial dollars in dividend-bearing equities, and reinvest the dividends into lower risk investments, like CDs (or whatever the American version of GICs are.)

    That way you take the risk initially when there’s still some time, but you pad the safety cushion of the portfolio over time as your dividends start to produce returns.

  10. FD,

    You are a very clever man and you’ll find your answer.

    I believe that the best way to invest is to first be very clear on your objectives and the time frame for achieving them.

    Clearly, the quicker you want to achieve your goals and the greater those goals are, the greater the risk you’ll have to take.

    I’d advise that you run yourself a little financial plan prior to doing anything. There are plenty of sites that can do that for you for free. This way, you’ll get a good idea of how much risk you have to take in order to achieve your goals.

    Last, you are already doing one of the best things you can do by having your own business – Frugal Dad! Keep it up man!

  11. Sorry- I just cannot do ING or HSBC. Putting my money in a foreign bank (just like I won’t do CITI group- owned by the Saudi). I have watched runs on their banks while living overseas and have no doubt that they would pull their money in a heart beat…not so sure FDIC could handle the pressure.
    Our local credit union is running a 3.5% CD for the year. I do drips and love them. I have some buy and hold stocks (that go up and down)that were bought for pennies on the dollar a year ago. I have a number of regular stocks. I will never do a mutual fund again (why should I pay someone else to watch the market when I am quite capable myself). I don’t have the patience for renters.Even the good ones drove me crazy. My dad bought the family mortgages at a reasonable rate which sustained him through his elder care.My brothers did flips and got killed in the flops.
    My point is- everyone has their own way. Find your way and you will probably be very happy.

  12. Rob: “I can point you to scores of tributes to John put forward by those whose lives were enhanced by his research despite the tiny amount of publicity it has achieved thus far”

    Please do so.

  13. Rob said: “90 percent of today’s investment “experts” are suffering from a cognitive dissonance that blocks them from learning what they need to learn to give effective advice.:

    Rob, does this rate apply only to those learned. degreed, tenured, published experts in the investing arena, or do all experts in all fields (say, civil engineers, or rocket scientists) also suffer from this astonishingly high rate of mental defect? Is there some study, paper, book, or other source where I can learn more about this amazing rate of impaired leadership? If supported, it certainly is shocking to learn!

  14. [i]Please do so.[/i]

    Here are the tributes to John put forward at the Morningtar site:

    Here are the tributes put forward at the Early Retirement Forum:

    Here is the tribute that I wrote (please scroll down to the heading entitled “John Walter Russell, RIP”):

    I also advise those interested in learning about how John’s research helped thousands of middle-class investors see through the marketing slogans of The Stock-Selling Industry to review the “Letters to the Editor” section of his web site (the site linked to above).

    I spoke with John’s wife Karen after his death. She told me that John saw his work (he worked 50 hours per week for seven years at zero compensation helping those in the Retire Early and Indexing communities with questions about investing — and was smeared from here to Kingdom Come by a small number of Buy-and-Hold dogmatics for going to the trouble) as Christian missionary work. I think that hits the nail on the head.

    The Stock-Selling Industry has millions to devote to promotion of the Buy-and-Hold “idea.” Those of us trying to provide sincere help to middle-class investors are at a disadvantage in that regard. But if you take a look at what this blog and hundreds of others have done in the frugality area, you know that we can get the job done on the internet once we win a few influential voices over to our side.

    There was a time when middle-class workers wasted their assets because they were taken in by the marketing efforts of the people selling us goods and services and credit cards. Today, we can congregate at a hundred different blogs and trade strategies for making more effective use of our money by learning about [i]realistic[/i] money management strategies. The revolution is waiting to happen in the investing realm. But it is every bit as important to invest well as it is to spend well.

    Sooner or later all effective savers must become effective investors. What good do all your frugality efforts do you if you end up following the “experts” from The Stock-Selling Industry and thereby lose most of your savings and are required to start over late in life? If you are working on becoming a good saver today, you should be thinking about what it will take to become an effective investor tomorrow. The [i]last[/i] place you want to turn to for good advice on how to invest is The Stock-Selling Industry (guess where Buy-and-Hold got its start?).

    We need to get serious about investing. We deserve better than what we are getting from The Stock-Selling Industry for ourselves, our families and our entire economic and political systems. Investing matters. It matters enough that we should be willing to work together to make a bit of an effort to get it right.

    When we all get to the other side of the Black Mountain, John Walter Russell will be universally viewed as a heroic pioneer of the early days of the transition to the Rational Model of understanding how stock investing works. None of us in the Retire Early and Indexing communities could have done what we have done without his help (Non-Numbers Guy Rob most of all!).


  15. Is there some study, paper, book, or other source where I can learn more about this amazing rate of impaired leadership? If supported, it certainly is shocking to learn!

    It’s shocking as all get-out, Anti-Crank. When I learned about this, I was shocked, amazed, stunned, and flabbergated. All that stuff.

    Yet the reality remains. I can check the Post Archives of the first seven years of The Great Safe Withdrawal Rate Debate and review how the entire thing played out, if I care to. Anyone else seeking to check the veracity of what I say here can of course do the same.

    I was the person who discovered the analytical errors in the Old School Safe Withdrawal Rate (SWR) studies. The studies don’t get the numbers a little bit wrong. They get them wildly wrong. 90 percent of financial planners use these studies to help people craft their retirement plans. They are used in 90 percent of the articles written about retirement. It is a HUGE story that these numbers are so wildly wrong, that we have known that they were wrong for over seven years now, and that the studies remain uncorrected to this day.

    I wrote Dallas Morning News Columnist Scott Burns about this. He did indeed write a column explaining the errors made in the retirement studies. But he said something more than a little strange in that column. He said that the reason why we don’t hear accurate retirement numbers in media reports is because “it is information most people don’t want to hear.” Huh? People looking for studies to help craft their retirement plans don’t want accurate information? That makes sense?

    And then something else “funny” happened. Scott went right back to writing about the Old School studies (the ones that get the retirement numbers wildly wrong) the next day! Double Huh! And, when I engaged in extensive e-mail correspondence with Scott re this matter, he said something exceedingly strange. He described my efforts to tell middle-class investors the accurate retirement numbers as “catastrophically unproductive.”

    How so? How can it be okay to report retirement numbers that are wildly wrong and yet be “catastrophically unproductive” to report the numbers accurately? In normal circumstances, this makes precisely zero sense.

    There are many who are likely going to draw cynical conclusions re these sorts of statements. I have felt a temptation to go down that road myself from time to time. But I like to be sure before I shoot my mouth off. So I dug deep. What I learned is that it is not just Scott Burns. There are lots of people who have said similar things. And these people are good and smart and hard-working people (as is Scott, to be sure).

    What’s your explanation, Anti-Crank?

    My explanation is cognitive dissonance. It is a well–recognized phenomenon in the psychological literature. When we are hit with something that is too big to take in, our minds go kerplooey and we just ignore the evidence staring us in the face and stick to our earlier fanciful notions no matter what.

    The academic research has been showing that valuations affect long-term returns since 1981. All of the “experts” in this field are obviously aware of this research; it’s their job to know about it. The research is of huge significance. But there is a problem. If we acknowledge what we have known to be true about stock investing for 30 years now, the roof collapses on the Buy-and-Hold model. Thousands of books need to be rewritten. Calculators need to be retooled. There are probably going to be thousands of lawsuits filed by investors who lost their live savings because of the bad advice we have been shoving down people’s throats for three decades since it was discredited. We have a huge mess on our hands.

    Perhaps if I were employed by The Stock-Selling Industry, I would be suffering from cognitive dissonance today too. I am not. I’m some guy who posts stuff on the internet. I made a lot of friends on the internet in the days when I posted only on saving topics (I was at one time the most popular poster on the entire Motley Fool site). I am not willing to post dishonestly on the numbers that my friends use to plan their retirements. So I am Public Enemy #1 in the eyes of a good number of Buy-and-Hold dogmatics. That fact alone tells a tale, in my assessment.

    I attribute this to a bad case of cognitive dissonance, Anti-Crank. If you have a better explanation, I invite you to put it forward. But I can say one thing with absolute certainty: There is something going on here that we had better figure out together before it sends both our economic system and our political system over a cliff.

    We all need to learn how to invest effectively. We cannot get to first base until we win the right to post honestly about the flaws in the Buy-and-Hold model. It upsets some people to hear the realities spoken about publicly. I get that. I feel for those people. But I know that the answer is not to continue to duck these questions., People are suffering. Those who have a pretty darn good sense of what the answers are have a responsibility to speak up at this point.

    This economic crisis is not a joking matter. It is hurting people. We should be engaging in serious discussions to solve the problem.


  16. R. Bennett said “last place you want to turn to for good advice on how to invest is The Stock-Selling Industry (guess where Buy-and-Hold got its start?).”

    Actually, I do know how indexing started. In addtion, the ‘stock selling industry’ was and is pretty much in direct opposition to Bogle and Vanguard. You might want to research that.

    Here is a start, from 2007:

    “John Bogle, 77, created The Vanguard Group, Inc., in 1974, which today is one of the two largest mutual fund organizations in the world, and was was the first index mutual fund. He retired as Chairman and Chief Executive Officer of the fund in 1996, yet remained Senior Chairman until 2000.

    In 2000, Mr. Bogle established the Bogle Financial Markets Research Center with Vanguard, which supports his continuing work on behalf of mutual fund investors.

    “My estimate is that the financial sector takes $560 billion a year out of society,” Bogle explains to Bill Moyers. “Banks, money managers, insurance companies, certainly annuity providers. They’re all subtracting value from the economy.”

    FORTUNE magazine in 1999 designated Mr. Bogle as one of the investment industry’s four “Giants of the 20th Century,” and in 2004, TIME magazine named him as one of the world’s 100 most powerful and influential people.

    For two decades, Bogle has been involved with the National Constitution Center, a nonpartisan organization dedicated to increasing awareness of the Constitution, and in 1999 he was unanimously elected NCC Board Chairman.

    Bogle has written six books including the best seller THE BATTLE FOR THE SOUL OF CAPITALISM (read an excerpt) and most recently THE LITTLE BOOK OF COMMON SENSE INVESTING.”

  17. (snips)
    “A long-time critic of his own industry and investment fads, Bogle sees plenty of problems in today’s financial markets. Bogle is skeptical about the accuracy of corporate reporting and worries that too many managers and directors are putting their own interests ahead of shareholders. It wasn’t unusual for Bogle to go against the current. Indeed, that has been the central theme of his career.The heart of Bogle’s indexing philosophy is the belief, supported by much academic and fund-industry research, that few active managers can consistently beat stock market averages year after year.The indexing approach seeks to dramatically reduce costs. “Low costs inevitably lead to higher returns,” Bogle said. While some investment experts labeled indexing “Bogle’s Folly” in the 1970s, his strategy’s merits have been clear to millions of investors.”

  18. do know how indexing started. In addtion, the ’stock selling industry’ was and is pretty much in direct opposition to Bogle and Vanguard.

    Bogle is a hero of mine, Simon. He is the godfather of the Rational Investing model, the model I explore at my site. And Bogle is the primary person responsible for promoting indexing. I recommend an investing strategy called “Valuation-Informed Indexing.”

    That said, Bogle also promotes Buy-and-Hold Investing. I think it would be fair to say that the harm he has done by promoting Buy-and-Hold far exceeds the good he had done by promoting Indexing. That doesn’t need to remain the case, however. If we can persuade Bogle to help spread the word about what we have learned about investing in the academic research of the past 30 years, Bogle’s contribution is transformed from being partly good/partly bad to being entirely good.

    Bogle is not the first person in the history of the world who got some important things right and also got some important things wrong. His investing approach was a First Draft of something new. We have discovered some big problems in the First Draft over the past three decades. So we proceed to the Second Draft. No?

    The problem has become that there are a number who have come to view the idea of moving to a Second Draft as “controversial.” That reality is as sad and foolish a reality as I have ever encountered.

    Bogle has said that Valuation-Informed Indexing can work, by the way. He hasn’t yet endorsed it but he has said that he is perfectly okay with it. Bogle is a lot less dogmatic than a good number of those who purport to be supporters of his.

    My view is that Rob Bennett is more of a supporter of Bogle than a lot of the people who advocate Buy-and-Hold. I support Bogle’s vision, which is in an important sense a humble vision. Bogle has not said that he knows it all. Those who claim in Bogle’s name to know it all and to be beyond questioning dishonor Bogle’s name, in my view. My aim is to take the Bogle Revolution to the next stage of its development.

    I would very much like to have Bogle working with us. He is the guy who has focused more on the needs of the typical middle-class investor than any of the other big names in the field. He’s a natural ally.


  19. While some investment experts labeled indexing “Bogle’s Folly” in the 1970s…

    Please reflect for a moment on these words, Simon.

    New ideas don’t always take off the first time they are advanced. Bogle knows this. Bogle has lived this.

    People come to see the benefits of new ideas only after they have spent enough time examining them from a large enough number of different angles to appreciate their full potential.

    Bogle changed the history of investing in a very positive way. We are now ready for a another big move forward. The Rational Investing Model is not anti-Bogle. It is Bogle-plus.

    You won’t find a bigger Bogle fan than Rob Bennett. But I don’t diss him by pretending that he is above all the other humans and thereby incapable of making a mistake. We have all learned wonderful things from John Bogle. It’s time to give a little something back.


  20. You sure do produce a lot of words! But, at the risk of seeming ungracious I feel I have to point out that there does not seem to be much substance i nthem, Mr. Bennett. Let’s see if we can focus, okay?

    You said:

    *** “The Stock-Selling Industry (guess where Buy-and-Hold got its start?).” ***

    That certainly looks like it is a direct indictment of “Buy and Hold” (whatever that may mean to someone) as being a product of the “Stock Selling Industry” (whatever that may mean to someone).

    Yet, I think I have established in just two links above (there are many more I would be happy to provide) that illustrate that Mr. Bogle’s approach is not only viable, not only sensible, but is also the antithesis of what the broker-driven industry that I *think* you are speaking of would have you engage in.

    So, for that reason, I think we need to define at least two terms and answer at least one question if we are to proceed in our dialog:

    1) Can you please define (or point to a definition) of “Buy and hold” investing?

    2) Can you please define (or point to a definition) of the “Stock Selling Industry?”

    And then,

    Are you saying that the ‘stock selling industry’ cranked out ‘buy and hold investing’ as a gimmick – one you also say doesn’t happen to work? I just want to be sure to accurately understand your rather unusual take on investing history before we move forward.


  21. “My problem is I’m a bit overwhelmed by all the investment choices, and their various implications for things like risk, taxes, etc”

    I’d say you couldn’t get much better a start than just browsing the following forums:


    Early Retirement Forums:

    Raddr’s Early Retirement and Financial Strategy Board:

  22. That certainly looks like it is a direct indictment of “Buy and Hold”

    Yes. It was the reckless promotion of Buy-and-Hold for 28 years after the academic research showed that the odds of it working for the long-term investor are precisely zero that was the primary cause of the economic crisis. Stocks were overvalued to the tune of $12 trillion in January 2000. As that $12 trillion goes “Poof!”, we experience thousands upon thousands upon thousands of failed retirements, failed businesses, failed marriages. Bad stuff.

    I like to think of myself as the most severe critic of Buy-and-Hold alive today, Simon. Please feel free to describe me as a fellow who opposes the further promotion of Buy-and-Hold. Buy-and-Hold to me is like sin. It’s just bad and there are no redeeming qualities. I trace all of our investing problems to the promotion of Buy-and-Hold.

    Mr. Bogle’s approach is not only viable, not only sensible

    Indexing, yes. Buy-and-Hold, not even a tiny bit.

    Indexers who are open to changing their stock allocations in response to big changes in the price at which stocks are selling always do well, according to the historical record. Indexers who refuse to change their stock allocations (Buy-and-Holders) always sooner or later end up busted. There are no exceptions in the historical record.

    It’s not hard to understand why. Imagine what would happen if millions of us elected to buy cars according to the “strategy” by which millions of us buy stocks. Say that it became the popular thing for us to not even look at the price of the cars we bought before we bought them. A car that is today priced at $20,000 would soon be priced at $40,000, and then $80,000, and then $160,000. Eventually, the entire economy would collapse because all of our money would be directed to buying cars and nothing else. A market that loses price discipline is a market on its way to collapse.

    This is what happened with stocks during the Buy-and-Hold Era. In January 2000, stocks were priced at three time fair value. That means that, each time you put $10,000 into your 401(k), you were getting back $3,500 worth of stocks and $6,500 worth of cotton-candy nothingness (the part of the purchase price of stocks that represents overvaluation has zero long-term value).

    It was not a few people engaging in such foolish transactions. It was millions of us. Persuade millions of people to waste hundreds of thousands of dollars each and over time it adds up! The secret to successful long-term stock investing is to buy stocks in the same way you buy everything else — always, always, always look at the price you are paying before putting money on the table.

    The focus of this blog is frugality. People who come here learn how to be frugal when buying cars and houses and vacations and comic books and sweaters. But they are taught nothing about how to be frugal when buying stocks. Most of those who come here get their investing advice elsewhere, where they are told to buy stocks, stocks, stocks, regardless of the price.

    Most of us are going to eventually put something in the neighborhood of $1 million into stocks before we are going to be able to retire. The frugal among us watch every dime that we spend on all the things that we spend small amounts of money on and then ignore price altogether when it comes to the thing we spend $1 million on! This makes sense?

    And why do we do this? Because the people who make their livings selling stocks say that it is a really good idea even though the academic research has been saying for 30 years now that it is a really, really, really bad idea. The “experts” who work for The Stock-Selling Industry are nice enough people, Simon. They are not saints. I think it would be fair to say that the advice they offer is a wee bit compromised by the fact that they make million-dollar salaries and bonuses only if they are able to persuade lots of people to buy stocks even when stocks are priced to provide very, very, very bad long-term returns. We should be checking out what they tell us before investing our retirement money pursuant to their “expertise.”

    are you saying that the ’stock selling industry’ cranked out ‘buy and hold investing’ as a gimmick


    The roots of Buy-and-Hold are in the Efficient Market Theory, a product of academic research of the 1960s. Bogle is the primary person responsible for changing the marketing of investment products so that it was rooted in academic research rather than subjective opinion. I view that development as a wonderful thing.

    The problem came in 1981, when Yale Professor Robert Shiller did research showing that the older understanding of how stock investing works is not supported by the historical data. Earlier researchers (led by Eugene Fama) thought that the market price became efficienct immediately. It turns out that the market price becomes efficient only gradually.

    This means that all of the strategies that were developed based on the old understanding were revealed to be 100 percent the opposite of what works. You don’t want to buy and hold, you want to be sure always to change your allocation in response to big price changes. You don’t want to avoid market timing, you want to be certain never to forget to engage in market timing (long-term success is impossible for those who fail to engage in long-term market timing). Stocks are not always best for the long run. At the prices that applied from 1996 through 2008, stocks were the worst choice for the long run. Even money markets were likely to provide better long-term returns than stocks at the prices that applied for those 12 years.

    Lots of people know this. About 10 percent of the experts have long acknowledged that Buy-and-Hold has been revealed to be pure nonsense. Rob Arnott (former editor of the <iFinancial Analysts Journal) has described today’s conventional investing wisdom as “myth and urban legend.” Warren Buffet has described it as “nutty.”

    The problem is that The Stock-Selling Industry has invested many millions of dollars into the promotion of Buy-and-Hold and does not want to acknowledge the error. Several financial planners have indicated to me that they would love to be able to give their clients straight talk on the realities of stock investing and more and more clients are demanding more realistic strategies all the time. But there is now a Social Taboo that prohibits straight talk on this subject. There are too many people who will be horribly embarrassed if middle-class investors learn the realities of stock investing.

    The trouble is — if we don’t teach the realities of stock investing to middle-class investor, we are likely to enter the Second Great Depression in the next few years. I believe that we need to work together to get out of this mess. In the long run, it is to the good of even The Stock-Selling Industry if we avoid going into a depression. There is not one person alive who in the long term is hurt if we open the internet to honest and informed posting on the realities of stock investing (as revealed by the academic research of the past three decades).

    We are all in a trap. Some people made a mistake and the rest of us are being held hostage because they cannot work up the grace to say those three magic words :”I” and “Was” and “Wrong.” We should certainly be charitable to these people. But we also need to insist on our right to discuss the realities of stock investing, To keep the Social Taboo on discussing the realities in place much longer is just too dangerous for every single person affected by the health of the U.S. economic or political system (the losses suffered in the first crash are causing many middle-class workers to lose confidence in their leaders, a truly scary development, in my assessment).


  23. In the world in which I live, the “stock-selling industry” pushes active investment management with lots of turnover. People like Bogle encourage buy-and-hold as just the opposite approach.

    In the world in which I live, there is CLEARLY no taboo against discussing each and every possible approach to investing. Take a look at the plethora of boards devoted to investing, each of which has many simultaneous discussions going on. Even Mr. Bennett has his own board, devoted to his own ideas, although nobody seems interested in posting there.

    I think Mr. Bennett lives in a different universe than me. I wonder if there’s anyone there with him.

  24. Whew. How about this — FD asked:

    “My problem is I’m a bit overwhelmed by all the investment choices, and their various implications for things like risk, taxes, etc. I’m a fairly conservative person, by nature, so the idea of taking a lot of risk does not appeal to me.”

    Since Rob is taking the ‘smother ’em with volume’ approach, I’ll do the opposite, since Google is our friend, and do like the guy from the graduate did, in a one word answer:


  25. Rob,

    Your confusion about Scott Burns is due to the simple fact that he didn’t actually agree with you. He acknowledged your opinion, but continued to recommend the established studies. He has continued to consistently do that for years after your discussion. What he called “catastrophically unproductive” is the behavior that you are demonstrating here. It’s what Scott called a “messianic” zeal to convert people to your idea which Scott thought was rather weak. If you put more work into your idea instead of merely promoting the idea with ever larger amounts of words posted to more and more websites, then you might have a chance to convince him and others.

  26. Rob

    Could you please take your crusade back to your own blog? Have you not noticed that Frugal Dad has ignored you and your request?

    Simon asked you to define what you meant by buy and hold and the stock selling industry. Your response total more than 1300 words yet you managed to say nothing.


  27. Rob says,

    “It was the reckless promotion of Buy-and-Hold for 28 years after the academic research showed that the odds of it working for the long-term investor are precisely zero that was the primary cause of the economic crisis.”

    Mr. Bennett, can you explain the success of Vanguard’s Wellington Fund, Wellesley Income Fund or Balanced Index Funds in light of this statement of yours? Or the returns for Bill Schultheis’ Coffeehouse Portfolio since its inception? It certainly doesn’t appear that these simple methods of investing in equities have had such dire consequences for anyone who used them as their preferred investment vehicle. It certainly appears you have a tendency towards extreme hyperbole. Alas, bombast is not especially useful in understanding various investment alternatives.

  28. Your confusion about Scott Burns is due to the simple fact that he didn’t actually agree with you. He acknowledged your opinion, but continued to recommend the established studies.

    There is no question but that Scott has agreed with me that valuations affect long-term returns. He offered several comments saying that. There is also no question but that Scott continued to recommend the Old School SWR studies. He has done that numerous times since publication of the column.

    The question that has never been answered is — how is it possible for a rational human mind (Scott is extremely smart and well-informed re the subject matter) believe both that valuations affect long-term returns and that the Old School studies (which contain no adjustment for valuations) are analytically valid? The historical data shows that the valuation level that applies on the day the retirement begins is the single biggest factor that determines whether the retirement will survive or not!

    It is because of this fundamental and widespread conflict — I have never run into anyone who disputed that valuations affect long-term returns and yet there are few who are as strongly opposed to Buy-and-Hold Investing (which says that changes in allocation in response to valuation changes are not necessary) as I am — that I attribute today’s problems to a huge collective case of cognitive dissonance.

    We of course all want to overcome the economic crisis. We of course all want to invest effectively. If what I am saying about Buy-and-Hold is so, then all of our problems can be easily solved. The data shows that, if we all switched to Rational Investing (the opposite of Buy-and-Hold — Rational Investing says you must change your stock allocation in response to big price shifts), we could all retire five years sooner. We could obtain higher returns with less risk. That’s investing heaven. That one change would be big enough to restore middle-class confidence in the markets, get people spending again, and pull us out of this crisis.

    So why the heck don’t we all just do it? There’s obviously something holding us back. I’ve thought about it and thought about it and thought about it and the best explanation that I have come up with is cognitive dissonance. This is so big that people just cannot let it in. As soon as someone begins to, a thought jumps into his brain that says “do you realize that this means that all of the investing advice of the past 30 years was telling us to do precisely the opposite of what we should have been doing?” and then his mind slams shut and he goes off looking for some rationalization to dismiss the idea or to ban discussion of it.

    If any of the rationalizations added up to anything, I would do that too and would go back to being a guy who writes only about saving and who is loved by all. But until someone comes up with some sort of reason for thinking that Buy-and-Hold is not the entire problem, I am going to continue to feel compelled to share with others what I have learned.

    I am not the only person who has come to the conclusion that the now-dominant model has failed us, Marcus. Here is a link to an article at my site at which I quote 20 different articles published since the crash that point out that the thought leaders in this field have known for many years that the Efficient Market Theory (the intellectual framework for the Buy-and-Hold Model) is pure gibberish:

    Sample Comments By Well-Regarded People Other Than Rob Bennett): The conventional wisdom of modern investing is largely myth and urban legend…. Stocks do not follow a random walk — this finding is confirmed by 30 years of research…. If empirical observation is incompatible with the model, the model must be trashed… Never underestimate the power of a dominant academic idea to choke off competing ideas, and never underestimate the unwillingness of academics to change their views in the face of evidence…. It’s hard to see how huge asset bubbles could fail to form! There are no built-in brakes to the process…. There’s so much that’s false and nutty in modern investing practice…. The academic economics of the past 20 years is comparable to pre-Copernican astronomy, with its mysterious heavenly cogs, epicycles and wheels within wheels or maybe even astrology, with its faith in star signs…. Following conventional wisdom has led a generation of investors down the road to ruin…. A moment’s reflection tells us this is nonsense…. Perhaps most scandalously, the theory remained received wisdom long after empirical and theoretical arguments had demolished it…. The belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place…. Everything has fallen apart…. We have taught economic nonsense to two generations of students…. The logical leap from observing that markets were unpredictable to concluding that prices were right was “one of the most remarkable errors in the history of economics.”

    If the old model has failed, does it not make sense that we get about the business of building a new one? We all have to invest somehow, do we not? And it makes zero sense to invest pursuant to a model as lacking in intellectual justification as the one described in that article. So what are we supposed to do?

    I think we need to work together to build a new model. I want to see everyone involved. Every personal finance blog should be working on this. Scott Burns should be involved. John Bogle should be involved. The Democrats should be involved. The Republicans should be involved. Our economic and political systems belong to all of us. We all should care about saving them when they are at obvious risk of destruction. Instead of fretting about our problems, we should be working to solve them. We would all feel a lot better about our futures if we at least got about the business of trying to do something constructive.

    Do I have all the answers? I seriously doubt it. But I can go to bed at night being able to say that I have given this thing a fair shot. I am trying. I invite anyone else who wants to do something positive to get involved. We might mess up. That happens. We also might do some wonderful work together. That’s been known to happen from time to time too. What’s the alternative? Passively listening to television reports describing our economic and political system going down the sewer? That makes sense?

    We have the potential to use the power of the internet to do something breathtakingly wonderful. I think we should at least take the ball for a run. If we fumble, we fumble. If we never even pick up the ball and run…

    …I don’t want to someday become an old man and be looking back on a record of never even having tried giving it a run when I had a golden opportunity to do some serious good presented to me.


  29. Have you not noticed that Frugal Dad has ignored you and your request?

    I’ve noticed that Frugal Dad has not responded.

    Frugal Dad’s silence can be interpreted in several different ways. One possible explanation is that he is looking to hear more before making a decision. In the event that that’s the explanation that applies, my job is to provide the best possible responses to any questions posed to me in an effort to get Frugal Dad on board. So I do what I can in that regard.

    I have the greatest possible respect for Frugal Dad and his work. He is a different person than me with a different set of life experiences. So he sees things from a different perspective. My job is to make the plea for help. His job is to filter that plea through the perspective provided by his set of life experiences and act accordingly. My job upon hearing the word “yes” is to do all that I can to make the initiative a success. My job upon hearing the word “no” is to accept that that is God’s will and that that decision is part of some bigger plan under which all things will work out for the best in the long run.

    I can live with “yes” (happily!). I can live with “no” (discouraged, but hardly for the first time). I could not live with myself if I became the sort of person who, knowing what I know, failed to work up the courage to make the plea. The way in which I have often put it over the course of the past seven years is: “I can do no more and I can do no less.”


  30. In the world in which I live, the “stock-selling industry” pushes active investment management with lots of turnover. People like Bogle encourage buy-and-hold as just the opposite approach.

    No. Bogle is part of The Stock-Selling Industry. He is the founder of one of the biggest mutual funds, for heaven’s sake. His company makes money through a somewhat different business model than its competitors but it is of course also run with the aim of selling product and making money.

    Any fund participating in “lots of turnover” is following a strategy of short-term timing. The historical data shows that that never works.

    Any fund following Buy-and-Hold is failing to practice long-term timing. The historical data also shows that that never works.

    Your comment suggests that the only two options open to stock investors is to lose lots of money by engaging in short-term timing or to lose lots of money by failing to take price into account when setting their stock allocations. These are obviously not the only two choices open to the informed investor.

    The entire record of stock performance going back to 1870 shows that what works is Valuation-Informed Indexing. You avoid short-term timing because it doesn’t work but you always practice long-term timing so that your nest egg doesn’t get destroyed in the stock crashes that inevitably follow time-periods when Buy-and-Hold Investing (ignoring price) becomes popular.

    You are not describing the two alternative possibilities available to us, DocWal. You are describing the two extremes. My belief is that the goal of the middle-class investor should be to avoid the extremes. We need to tune out both those who advocate short-term timing and those who advocate Buy-and-Hold. That’s Rational Investing.

    In the world in which I live, there is CLEARLY no taboo against discussing each and every possible approach to investing. I think Mr. Bennett lives in a different universe than me. I wonder if there’s anyone there with him.

    Here is a link to an article at my site that quotes 101 community members in the Retire Early and Indexing discussion-board communities who express a desire that honest posting on what the academic research of the past 30 years has taught us about the dangers of Buy-and-Hold be permitted on all of our boards:

    Sample Comment: Rob’s da man! Never in the history of the Diehards forum has one poster, always making civil and well thought-out posts, managed to irritate so many without anyone being able to articulate a good reason as to why.

    Lots of middle-class investors have expressed anguish over the financial ruin caused by the reckless promotion of Buy-and-Hold, DocWal. The trouble has been that there is another group that intensely opposes the idea. I think it would be fair to characterize the “arguments” of this group as defensive in the extreme.

    Those who have followed Buy-and-Hold strategies and/or recommended them to others are feeling real pain today. I get that and I am of course sympathetic. The question is — What is the most responsible course of action given the realities? The pain and anger and shame that many of us are feeling are not going to go away through a collective decision to continue to duck the important questions. Ducking the important questions for the past 28 years is what got us into this mess in the first place.

    I advocate a policy of dealing with the sensitive issues in a spirit of charity for all involved. The goal here is a positive goal. But I see no way that we can make progress without accepting the need to permit people to speak honestly. We all have different views. To learn together, we all must express those views honestly. It is the social taboo on honest exchanges of different viewpoints that has come to govern investing discussions during the Buy-and-Hold Era that is the obstacle to us all moving forward to the place where deep in our hearts we all very much want to be.

    There is not one person alive on Planet Earth today who will be worse off if we all begin discussing these questions openly and civilly and reasonably. The Buy-and-Hold Era has come to an end. We need to accept that and move on to the next thing. There are obviously going to be different thoughts about what the next thing is. That’s a it should be. That’s healthy. The idea that Buy-and-Hold may not be questioned is not even a tiny bit healthy. That idea runs counter to all that our nation has stood for dating back to its formation. That idea needs to be placed 20 feet in the ground where it can do no further harm to any of us.

    The idea of a discussion on a blog is to learn. Learning begins with an acceptance that there is no one group among us that knows it all and that we all need to show respect and affection for those with different viewpoints who are taking time out of their day to help us discover understand something that they understand better than we do.

    It is only those who are able to accept that they do not already know it all who are able to take part in any learning experiences whatsoever. And we are all in great need of learning experiences today. That much is as clear as clear can be to all reasonable people.


  31. Bennett claims the fact that pretty much the entire world disagrees with him is puzzling, so…

    “I’ve thought about it and thought about it and thought about it and the best explanation that I have come up with is cognitive dissonance.”

    How about another round of thinking, Rob, but this time guided by some helpful ideas, okay?

    — Valuations matter. True. And you sometimes do admit that you have had no one disagree, so why you keep claiming they do is beyond me. But let’s go on…

    — Doing something about the fact valuations matter is problematic. Arguably*, Buffett seems to have a method to deal with this, but anyone else? Not so much.

    — The market tends to return six or more percent per year over time. Most people’s horizons are sufficiently long that they feel (and data supports) that capturing this return through low cost broadly diversified index funds is realistic.

    — It is axiomatic that you should only take the risk required to achieve your goal, and no more.

    — It is largely believed (but often argued) that timing the market or picking individual stocks is a fool’s errand for the layman.

    The best thought exercise I can offer you if after all that thinking, thinking, thinking, you are still interested in resolving the puzzle of why you alone appear to disagree with the world is to ask you to consider this: When listening to the radio, there is always a certain amount of static (noise) along with the music (signal). The long term return of the market is the music. Price fluctuations up and down on temporal feelings or events are the noise. Most people seem to be intently trying to find and capture the music. You, on the other hand, seem intensely curious about what others consider noise.

    Rob, many great breakthroughs have been made by ignoring the mainstream, following your muse, and discarding conventional wisdom. But here is the rub: The laws of science and physics and simple arithmetic always apply. They are immutable. The difference, then, between cranks and visionaries might be thought of as:

    — Visionaries discard conventional wisdom, but never logic and science and math.

    — Cranks discard conventional wisdom, and also refuse to agree that their ‘new’ theories must (in order to be useful and adopted) not only discard the current orthodoxy, but must also conform with the known laws of the universe.

    I am sorry to say that your own thinking and theories do not impugn today’s best information in any way, shape, or form. Any idea you have with merit was already incorporated into the body of knowledge long ago. Anything you tout as novel is found to be simply unsupportable. I’d give you a friendly suggestion that you pack it in, and try another field, truly. Something where you can use your hands, ideally.

  32. I had hoped to hear more from readers about their strategy for early retirement through taxable investing. Unfortunately, things are deteroriating into a fight between Rob and everyone else.

    Rob, I admire your passion, but may I suggest a more concise approach to getting your point across, and a more private way of soliciting help from others to meet that goal?

    I want to keep the “community feel” alive and well here at Frugal Dad, and the best way to do that is to continue with the idea that all ideas are good ideas, because different things work for different people (and their specific situations). After writing and interacting with others the last few years, I find myself to be much less “black and white” about many of these topics than I was early on. I’m still opinionated, and have my own set of beliefs, but I’m not out to convert the rest of the world into thinking like I do.

    Thanks to all of you for participating with passion – but let’s try to keep it all friendly in the interest of civil discourse.

  33. Oh, forgot to add — the ‘arguably’ part about Buffet’s singular success is that many folks don’t think he is as much a genius at timing the market and/or picking stocks, as he is a genius at finding companies with both solid attributes as well as obvious issues, and then managing those issues out, until the value remains, then the stock price appreciates and so he makes a profit for his wisdom and effort.

    To me, that makes perfect sense, is not magic, but neither is he the wizard able to see the future that some tout him as. He is a sound businessman who now has a ton of resources and experience and gravitas at his disposal.

    It frankly, IMHO, also has little to no relevance for the average investor with a regular job and a desire to retire early.

  34. Mr. Bennett, can you explain the success of Vanguard’s Wellington Fund, Wellesley Income Fund or Balanced Index Funds in light of this statement of yours?

    Stocks are a wonderful asset class, Carlyle. That’s the entire explanation.

    When The Stock-Selling Industry shows you charts purporting to report on the returns provided by these funds, they are not reporting the returns earned by investors. They are reporting the returns earned by the funds. Those are two very different things.

    Look at what happened in the 1929 crash. Stock prices fell by 89 percent, 80 percent in real terms. How many middle-class investors do you imagine remained fully invested after an 80 percent price drop? I think it would be fair to say that the answer is: “a number closely approaching zero.”

    Since the vast majority of middle-class people cannot live through the devastating losses always associated with Buy-and-Hold Investing (Buy-and-Hold was extremely popular in the 1920s), virtually no living person earns the returns reported in the sorts of charts you are referring to. The funds earn those returns on paper. Those are the returns that apply in a theoretical sense when the “analysis” is set up in the way in which The Stock-Selling Industry likes to set things up. But there are few or no real live human beings who get to use those sorts of returns to pay the electric bill or the health bill or the mortgage. The sorts of charts you are pointing to are do not report real-life stuff. That’s fantasy world stuff. Those charts are promotional tools developed in the marketing departments of the big fund companies.

    That said. those charts tell us something important. They tell us that informed investing in stocks is the road to financial freedom for middle-class workers. We cannot get those returns by following Buy-and-Hold strategies. But we should want to be figuring out a way to obtain those sorts of returns. If we could figure out a way to obtain those returns in the real world, we could all retire many years sooner than if we invested in super-safe asset classes like certificates of deposit.

    Can it be done?


    There is only one simple secret that needs to be kept always in mind. Never, never, never give in to the emotional impulse to buy into what The Stock-Selling Industry and its Marketing Machine is telling you about Buy-and-Hold Investing. The secret to buying stock is to follow the same exact practice as the one you follow when buying a house or a car or a comic book or a banana — always look at price, never practice Buy-and-Hold.

    The magic of looking at price is that you avoid those 80 percent price drops that cause you to lose out on the benefits of decades of saving efforts. Stock crashes are not random events. We have never seen a price crash of any great consequence starting from a time of low or moderate prices. We have never gone to the sorts of prices that applied from 1996 through 2008 and not experienced a huge price crash. Anyone who loses his retirement to a price crash does so voluntarily. Anyone who loses his retirement to a price crash does so as the result of giving in to the emotional impulse to participate in the Get Rich Quick scheme that is known by the name of “Buy-and-Hold Investing.”

    Buy stocks heavily only when it makes sense to buy stocks heavily and you really will enjoy the sorts of returns reported in those charts. Buy stocks foolishly (according to the Buy-and-Hold marketing slogans) and you will spend your life saving what you need for retirement and then losing most of it and then starting over again at a far more advanced age.

    The root problem is that the financial interests of The Stock-Selling Industry are directly opposed to the financial interests of the middle-class investor. The middle-class investor wants to see good returns with low risk. The Stock-Selling Industry wants to sell product at whatever price possible. So long as you tune out the industry “experts,” you are home free. For the investor willing to tune out the marketing slogans, stocks really do offer great returns at minimal risk.

    In the days before the internet, most of us had no choice but to accept the investing “advice” of The Stock-Selling Industry as gospel. We did not have easy access to better-informed takes. With the growth of numerous blogs that permit us to share with each other what works rather than what sells, this is no longer so. Starting here, starting now, we could begin sharing with each other what we have learned and thereby change the history of stock investing.

    Most of us who post to blogs are not employed by The Stock-Selling Industry. We are free to tell people what really works and to point out the trickery used in the various marketing materials and all this sort of thing. I see this as a golden opportunity to change the world in an extremely positive way. I’d like to see hundreds of influential blogs opened to honest posting on investment topics. Of course we need to start with one and thereby get the ball rolling in the right direction.

    The idea of permitting honest posting on investment topics is something that has not been tried before. It is something new and exciting. I see huge potential in the idea.


  35. Rob, I admire your passion, but may I suggest a more concise approach to getting your point across, and a more private way of soliciting help from others to meet that goal?

    I am happy to proceed in any way in which you would like to proceed, Frugal Dad. I have sent you e-mails on these questions before and not received responses. My goal is just to get the ideas out before people. I am happy to do it in e-mails or telephone calls or blog comments or private meetings or whatever. What matters to me is that we get about the business of opening the internet to honest posting on investment topics and thereby work our way out of this investment crisis.

    As for the length of the comments, my entire message can be reduced to five words — Valuations Affect Long-Term Returns.

    Anyone who accepts that as true (I don’t know of anyone who does not) and who thinks through the implications understands that Buy-and-Hold can never work. If valuations affect long-term returns, the value proposition of stocks is obviously changing with each change in valuations. It follows that sticking with the same allocation in the face of big price changes is an act of insanity. It is not only that it has never worked in the historical record. It is that it is not even possible for the rational human mind to imagine any circumstance in which it ever could work.

    It’s that simple, Frugal Dad. Five words.

    The problem is that people have been hearing the opposite message for 30 years. Over and over and over and over again. It shocks people to hear that Buy-and-Hold doesn’t work. I am not responsible for that. I have never promoted Buy-and-Hold. All that I am doing is reporting the realities. There shouldn’t be anything even a little bit “controversial” about anything that I say. The controversy stems solely from the fact that what I say is 100 percent opposed to the conventional investing wisdom of the past 30 years.

    The result of our all hearing the wrong messages for 30 years running is that we are all terribly confused about all sorts of points. I can’t just make a simple point and expect everyone to get it. People have come to sincerely believe in all sorts of “myths and urban legends” and those mistaken beliefs trip them up. Given the importance of these questions, I believe that the responsible thing to do is to make an effort to be as clear as possible, to go through each step of the logic chain as slowly and as carefully as possible. That’s why I post long. I want people to understand what is being said despite the fact that they have taken in so many contrary claims for so many years now.

    If you have any ideas for better ways to proceed, I an entirely open to them, Frugal Dad. The reality today is that there are a good number who are looking for new and better ideas. I have spoken to a large enough number of such people to know with certainty that there are a lot of such people out there. There also are a good number who are intensely opposed to the idea of these discussions being permitted. That is a stone cold fact for which there is a wealth of supporting evidence at this time.

    How do we proceed?

    It seems to me that we must go forward. But it also seems to me that we must take into consideration the sensitivities of those who find some of these ideas shocking and offensive.

    My thought is that the way to proceed is to combine two principles — honesty and love. I engaged in extensive discussions of these questions with a friend of mine (Brian) back in the late 1990s. We used to meet for lunch a couple of times per week and discuss these questions in great depth. Brian often said that I was “nuts” but he always did so in a tone of friendship and affection and respect. So there was of course no problem. Today Brian believes that I was right all along (it was the stock crash that brought him on board).

    I believe that it is this combination of honesty and love that is the answer. I strongly oppose Buy-and-Hold Investing. But I also feel great respect for many of the smart and good people who believe in Buy-and-Hold. I separate the idea (which I hate) from the people who believe in it (whom I love). I believe that the answer to our current economic troubles lies in doing all that we can to make this Love/Honesty Approach the common approach to these questions.

    I believe that we need further discussion of these questions, not just here but at lots of places in the Personal Finance Blogosphere. But I also believe that the discussions will tear us apart unless we go into them with a sincere desire to insure that the discussions are conducted in a warm and friendly environment. On the intellectual points, people should of course be encouraged to express any skepticism they sincerely feel. That’s how we learn. But we need to adopt strong limits on how much of the nasty personal stuff we will tolerate. That stuff hurts us and sends our efforts backwards every time we show a bit of unfortunate tolerance for it.

    My strong hunch is that there are people reading these words who would like to ask questions about these ideas but who today are holding back from doing so because they fear what will be said about them if they give voice to the concerns that are truly on their minds. People don’t want to be made to feel that they are dumb for asking a question. We need to protect those people from abusive posting. We of course at the same time need to encourage those with genuine doubts about the new ideas to give full expression to those doubts (but in a friendly and warm and civil way).

    Those are my thoughts re the best way to proceed at this point, in any event.


  36. Doing something about the fact valuations matter is problematic. Arguably*, Buffett seems to have a method to deal with this, but anyone else? Not so much.

    I disagree with you that there is something “problematic” with taking advantage of the fact that valuations matter, Simon. But I also think that you have your finger on a point of huge importance in the words quoted above.

    Warren Buffett is the most effective investor alive. If we could all copy him, we should all copy him. We cannot. But Bogle’s Indexing Revolution gives us all the opportunity to come much closer to doing so than we imagined possible in earlier days.

    Buffett practices Value Investing. That is the opposite of Buy-and-Hold. With Buy-and-Hold, you ignore the value proposition of stocks, you invest heavily in stocks regardless of whether the long-term value proposition is strong or weak. Buffett analyzes the value proposition. He puts his money only in strong value propositions and protects himself by not putting any money into poor value propositions.

    Buffett’s approach is extremely complicated. That’s the rub.

    But we no longer need to go through all the work that Bogle goes through to insure that our stock purchases reflect strong value propositions. With indexes available to us, all that we need to know to know the long-term value propositions of our stock purchases is the valuation level that applies at the given time to a broad index. By looking at that information, we avoid 80 percent of the risks of stock investing that apply for those who are unwilling to question Buy-and-Hold.

    That’s what I propose. That’s Valuation-Informed Indexing.

    There’s nothing fancy about it. There’s nothing complicated about it. There’s nothing tricky about it. It’s pure common sense. Why wasn’t it discovered a long, long time ago? It was! Benjamin Graham (Buffett’s mentor) advocated the same approach back in the 1930s. The trouble was that, in Graham’s day, index funds were not available. So the only way to follow this approach was to engage in the extensive research that Buffett and his followers need to engage in. With the availability of index funds, all investors can enjoy the high risk and the low returns of Value Investors without having to engage in the extensive research that has in the past been required to obtain such benefits.

    There is no excuse not to let people know about these opportunities, Simon.

    Bennett claims the fact that pretty much the entire world disagrees with him is puzzling

    There are of course hundreds of thousands of people practicing informed investing strategies today, Simon. If you go to the Bogleheads board (recommended yesterday by Anti-Crank), you will see fine posters like CJKing talk about these strategies regularly. There are many others who have explored them in great depth and who were banned from the board for doing so. And there are numerous experts who have endorsed these ideas: (1) Rob Arnott; (2) Cliff Asness; (3) John Walter Russell; (4) Andrew Smithers; (5) William Bernstein; (6) Jeremy Grantham; (7) Ed Easterling; (8) John Mauldin; (9) Robert Shiller; and on and on.

    Here is a link to an article at my site that provides links to 20 studies showing that these ideas work:

    I am some guy who posts stuff on the internet, Simon. Most of the ideas that I write about are not ideas that I discovered on my own (there are a few exceptions). Most are ideas that I picked up from others either by doing research on the internet or by talking things over with my fellow community members on discussion boards and blogs. There is a wealth of evidence in the record today that Buy-and-Hold is the investing model of the past and that Rational Investing is the investing model of the future. The idea that seems to have formed in your head that Buy-and-Hold has in some sense been “proven” is the source of the entire disconnect. The now-dominant model has by no mean been proven.

    Norbert Schenkler is a critic of mine (he banned me from a discussion board that he owns). But Norbert to his credit once went to the trouble to see what the historical data actually says about Valuation-Informed Indexing. His conclusion was that: “Valuation-Informed Indexing is pretty clearly superior everywhere, although there are a few occasions ending in the last half of the 90s, i.e. starting in the last half of the 60s, where Buy-and-Hold has a small advantage [Note: These words were written prior to the September 2008 stock crash — they no longer apply]. Recent differences appear to be quite minor, although I would point out that an extra 1/2% a year over 30 years is not chicken feed.”

    It’s not just me, Simon. There have been lots of people who have expressed grave doubts about Buy-and-Hold going back to the first days when it was put forward. More and more are coming around all the time to the view that this “strategy” can never work in the real world. All personal finance blogs need to be exploring these questions in a positive and constructive spirit, in my assessment.


  37. “There is no question but that Scott has agreed with me that valuations affect long-term returns.”

    I agree that there is no question. He simply reported the disagreement. And when you replied with gigantic messages, his response was that “unfortunately” they were an example of what he meant by “catastrophically unproductive”. I agree with him. You can’t make up for a lack of data with an unlimited number of words. I’ll waste no more of Frugal Dad’s bandwidth on this deteriorated blog entry.