Am I Crazy For Being Out of the Stock Market for 14 Years

Beyond Buy-and-Hold #12

By Rob Bennett

I sold my stocks in the Summer of 1996. My money has been in Treasury Inflation-Protected Securities (TIPS), IBonds and Certificates of Deposit (CDs) for the past 14 years.

Some people think I have made ?extreme? choices. I do not. I hope you are willing to listen to my case.

The words ?extreme? and ?moderate? are relative terms. What is extreme in some circumstances can be entirely moderate in others. For example, driving at a speed of 60 miles per hour is certainly not extreme for those driving on a highway but is entirely out-of-the-ballpark nutso for those driving in residential neighborhoods.

Any fair analysis of the question of whether my stock allocation is an extreme one or not requires consideration of the circumstances in which that allocation was elected.

From a Buy-and-Hold perspective, my allocation is extreme. The Buy-and-Hold Model posits that it is not possible to know in advance how stocks are going to perform at any given time. If that is so, then the best way to assess whether stocks are a good buy or not is to assume that you will receive a long-term return somewhere in the general neighborhood of the average long-term return — 6.5 percent real.

No other asset class offers a value proposition that good. Under the Buy-and-Hold Model, it never makes sense to go with a low stock allocation and a zero stock allocation is always extreme.

There’s a time to be playing it super safe

I don?t believe in the Buy-and-Hold Model.

I believe that long-term stock returns are highly (but not precisely) predictable. I believe that the valuation level that applies when you buy stocks determines the long-term return you obtain from them. That is, the price paid determines the value proposition obtained.

If that?s so, there are circumstances in which going with a low stock allocation makes sense. Say that you could obtain as high a long-term return from one of the super-safe asset classes as you could obtain from stocks? Do you think it would make sense to go with stocks in circumstances in which you expected to obtain a lower long-term return in ?compensation? for taking on the extra risk? The question answers itself.

I was able to obtain a return of 3.5 percent real or higher from my investments in super-safe asset classes for the entire time-period from the Summer of 1996 through today. I of course understand that such rates are not available today. But I have been disenchanted with stocks for 14 years. So I have been looking for appealing alternatives for that entire time -period. When TIPS and IBonds were offering long-term returns of 3.5 percent real, I locked in that rate.

I have a calculator at my web site that performs a regression analysis of the historical stock-return data to reveal the most likely annualized 10-year return for stocks starting from any of the various valuation levels. At no time in the past 14 years (with the exception of a few months in early 2009) has the most likely annualized 10-year return for stocks been greater than the 3.5 percent real return that I have been obtaining from TIPS, IBonds and CDs.

The validity of the calculator has been vindicated over the 14-year time-period. The benefits of staying out of stocks for so long as they are insanely overpriced is no longer merely a theoretical one for me. I am today ahead in dollars-and-cents terms of where I would be if I had been putting most of money into stocks from 1996 forward.

I haven’t missed out!

If you believe in Buy-and-Hold, my zero stock allocation has been extreme. If you believe that valuations affect long-term returns and that valuations are likely in the future to have roughly the same effect on future returns as they have always had in the past, there has been nothing whatsoever extreme about my zero stock allocation. A zero stock allocation is an entirely moderate choice in circumstances in which the super-safe asset classes are paying higher long-term returns than stocks.

There clearly is something extreme going on, however. An objection that I often hear when I describe what I have done is that 14 years is too long a time-period to be out of stocks. Many investors would be willing to lower their stock allocations for a year or two but feel very uncomfortable with the idea of doing so for 14 years.

I get the point. It is indeed an exceedingly strange reality for the super-safe asset classes to over a better deal than stocks for so long a time-period. It should never happen. But it did happen. The numbers are our best guide to the realities. It is not Rob Bennett who says that this strange reality is so. Rob Bennett merely reports the numbers. It is the numbers that say that this is so. My view is that it would be immoderate behavior on my part for me to ignore what the numbers say.

Most middle-class investors are moderate people. They disdain extremism. When they hear that I have been going with a zero stock allocation for 14 years, it is a turnoff for them.

I understand the reaction. I disdain extremism too, especially in money matters. My point here is that, from the standpoint of someone who believes that valuations affect long-term returns, a zero stock allocation is not extreme. It is high valuations that are extreme. And, since it is the widespread belief in Buy-and-Hold that has kept investors from selling and thereby pulling prices back to reasonable levels for all that time, it is Buy-and-Hold that is extreme in my eyes.

It?s not that some of us are extremist and some of us are not. It?s that some of us believe in Buy-and-Hold and some of us do not (another way of saying it is that some of us believe that valuations affect long-term returns and some of us do not). That?s something we all should be talking about.

If the Valuation-Informed Indexers are right that valuations affect long-term returns, it is those who stuck with high stock allocations for the past 14 years who have been following extreme strategies without meaning to do so.

Have you been solidly invested in stocks since 1996? Are there times you wished you’d invested in your money in super safe interest-bearning instruments during that time? With the market hanging around Dow 11,000 where should we be investing our money going forward?

Rob Bennett says that we are living in a time in which even the experts don?t necessarily get the investing basics right. His bio is here.

( Tortise photo by nicknbecka; Hare photo by jtkerb )

22 Responses to Am I Crazy For Being Out of the Stock Market for 14 Years

  1. World Ex US has returned over %% PA and the US market has returned over 4% PA since you sold out. What did your cash get you, expecially post tax?

    There are many other assets than the US stock market and cash eg Gold is up 4X since then. I suggest you consider widening your investing horizons.

  2. Correction: World Ex US has returned over 5% PA and the US market has returned over 4% PA since you sold out. What did your cash get you, especially post tax? Figures from

    There are many other assets than the US stock market and cash eg Gold is up 4X since then. I suggest you consider widening your investing horizons.

  3. I suggest you consider widening your investing horizons.

    I’m grateful to you for sharing your thoughts, Innocent Bystander. I know that many feel as you do and it helps us all learn when someone like you takes the time to advance other points of view. Perhaps you are right and I am wrong. Certainly there is a case that can be made in that regard. Perhaps we are both right about somewhat different aspects of the question (that’s what I think is really going on here).

    I will tell you where I am coming from. I do have a small amount of gold and I have earned a big profit on it. But there’s no question that I am primarily a stock guy. There’s always going to be some asset class that is going to do better than what we are invested in when we examine returns on a look-back basis. What we need to know is what is the best asset class on a look-forward basis since we do not know how the future is going to turn out when we make our investment decisions. My take is that it is stocks that most reliably offer the best long-term value proposition. This is actually one re which I am in strong agreement with the Buy-and-Holders (the only matter re which I am not in accord with the Buy-and-Holders is the valuations question).

    The way that my thought process works is that I start out by knowing that my goal is to get that 6.5 percent real return that is the long-term average for stocks. I can achieve my goals if I get that number and stocks reliably provide it. So I really don’t worry about other asset classes. I don’t mean to say that there can never be a benefit for doing so. I understand that those who are willing to take the time to research other asset classes may indeed reap better returns by doing so. I just don’t want to put the effort into doing the research I would need to do to feel comfortable investing in non-stock asset classes. I willingly give up the potential of earning returns of greater than 6.5 real because 6.5 percent real is plenty good enough for me and it is so easy to hit that mark by investing in stocks in an informed way.

    The next step in the logic chain is to consider what must be done to get that 6.5 percent real. We know that valuations affect long-term returns. That means that that average return of 6.5 real cannot possibly apply at times of high valuations; the long-term return for stocks must be a good bit lower at such times. And it must be higher at times of low valuations. So my thought is that it makes sense to go with a higher stock allocation at times when stocks are selling at low prices and to go with a lower stock allocation at times when stocks are selling at high prices. Then I am likely to get MORE than 6.5 percent real, but certainly at least that much (which is plenty good enough, in my assessment).

    The only remaining step is to identify an asset class where I can put my money during those time-periods when stocks are so overpriced that the long-term value proposition is poor. Remember — I am a stock guy! I want to get that money in stocks as soon as possible. So I am personally not interested in non-stock asset classes other than the super-safe ones. The benefit of the super-safe asset classes is that I don’t have to worry about volatility. As soon as stocks offer a good value proposition again, I can move my money over to where it will be bringing in a higher return.

    A lot of people look at the 3.5 percent real return that I am getting in the super-safe asset classes and are not impressed. They are looking at the wrong number. When stock prices get to one-half fair value (they always do in the wake of huge bull markets because huge bull markets always cause an economic collapse), stocks will be paying a likely 10-year return of 15 percent real! The 3.5 percent real return that I am getting today is TEMPORARY. That money will be earning a far higher long-term return when you count what it will bring in when stocks are again priced well.

    Anyway, that’s my approach. I do think there are other approaches that can do better. I do NOT say that Valuation-Informed Indexing will get you the best possible return. My claim is that it will get you the best return you can get by going with a super-simple, low -risk approach. It wouldn’t surprise me to learn that you are beating my pants off! And I think that’s a good thing. We need to have people invested in the more exotic asset classes to keep the whole system working. I just personally do not care to put in the work I feel I would need to put in to feel comfortable investing in anything other than broad stock indexes (for growth) and super-safe asset classes (for long-term survival at times when stock are insanely overpriced).

    Complexity is not my thing. One of the things that I love about John Bogle is that he puts a great deal of emphasis on keeping it simple. I view Bogle as being one of my mentors. I think he is a genius and one of the most important pioneers in this field (I also of course think that he made the biggest mistake in the history of personal finance when he came to the conclusion that there is no need for investors to consider valuations when setting their stock allocations).


  4. I don’t think you’re crazy. I think that the most important thing to keep in mind when investing is to take risks that you are comfortable with. I have a significant portion of my retirement funds in CDs as well, but that is dwindling as I am slowly adding index funds. I’m still not really comfortable investing a large portion of my retirement funds in stocks, so I’m not. I don’t care who tells me I should – I’m not going to do something that I’m not comfortable with and it’s my decision.

  5. I don?t think you?re crazy.

    Is it okay if I use you as a reference, Tara? There are one or two places that I have visited in my travels around the internet where one might come in handy.

    I’m just joking around. I thank you for your kindness. And I of course wish you (and all reading these words) the best in your future investing endeavors regardless of which approach you ultimately elect to follow.

    I put up a tweet quoting my words in my response to Innocent Bystander that “I do NOT say that Valuation-Informed Indexing will get you the best possible return.” A fellow named Andy Matthews let me know that he “favorited” that tweet. I thought that was really nice.

    It’s my sense that there are a lot of people who would like to hear less dogmatism and less salesmanship in their investing advice regardless of what sort of strategy is being advocated. I am going to make a special effort to keep that growing public desire in mind whenever I write on the topic of investing. My hope (and belief) is that we are going to see more and more of that kind of thing in the event that the economic crisis continues to worsen. Paradoxically enough, the less sure we are of ourselves, the greater are the odds that we will be able to summon up the flexibility needed to get to a place where we will be able to start to feel some genuine confidence in what we are doing.


  6. I admire your ability to step forward and put your convictions into practice. The challenge, as always, is in attempting to determine what will happen going forward. It is easy to look back at the last 14 years and either pat you on the back or beat you up for your investment decision.

    I continue to believe that asset allocation offers me the highest potential for success. I have no insight into the performance of individual investments and as a result avoid them. I maintain a mix of low cost stock and bond mutual funds with emergency funds in CDs and have slowly increased my bond exposure as I age. I also have a military retirement to balance out my risk, which helps me sleep at night.

    I also believe in the thought that in order to succeed with my investment portfolio, I should own some investments that make me a bit nervous.

    I hope going forward that investment success lies somewhere in the middle between the allocations of each of us.

  7. I admire your ability to step forward and put your convictions into practice.

    Thanks for those kind words, Al.

    I also believe in the thought that in order to succeed with my investment portfolio, I should own some investments that make me a bit nervous.

    I believe in this to some extent. But not to the extent that the Buy-and-Holders say that I should believe it. My belief (based on the research of Yale Economics Professor Robert Shiller) is that stock returns are highly predictable (by looking at valuations) at 10 years out but not predictable at all in the short term. Since stock returns are not predictable in the short-term, an investor not willing to accept any uncertainty does lose out on the opportunity of investing in a super asset class, in my assessment. To that extent I agree that being willing to accept some nervousness is a good thing.

    That said, the Buy-and-Holders increase the nervousness they must endure dramatically by being unwilling to take price into consideration when setting their allocations. The data shows that valuations are 80 percent of what determines the stock price at 20 years out. An asset class that is 80 percent predictable cannot fairly be characterized as a risky asset class, in my assessment. Many people try to buck themselves up to deal with the risk of stocks when they could easily do away with the vast majority of that risk simply by being willing to take prices into consideration when buying.

    My view is that it makes sense to take on some uncertainty for the sake of higher returns. But I do not think it makes sense to follow investing strategies that greatly increase risk while not adding to returns at all (but in fact LOWERING them). Most of the risk that stock investors take on is optional, in my view. All investors should be working to reduce optional risk, risk that does not offer any compensation in the form of higher returns.

    I hope going forward that investment success lies somewhere in the middle between the allocations of each of us.

    I am very much looking forward to the day when prices will again be reasonable enough that we will both be enjoying the wonderful long-term benefits of stock investing, Al. My sense is that that day may not be all that far off. I think we are in agreement that in the distant long-term stocks always pay off well. So I will feel a lot more comfortable about all sorts of things when I can again feel confident that a moderate or high stock allocation make sense for me.

    I wish you the best of luck with your portfolio, my new friend. Thanks so much for adding some balance here by taking the time out of your day to share your thoughts with all of us.


  8. I wanted follow up with one additional comment.

    I am not saying this will happen to you but, have seen it over and over again in the past, and that is those who manage to call a single market move correctly and are forever, or at least in the near future, considered investment prophets.

    I remember Elaine Garzarelli who became known for “predicting” Black Monday, the stock market crash of 1987. For years afterwords she was the go-to face on TV for market predictions. I don?t think she got another prognostication right.

    The challenge, to me at least, is in establishing a long term portfolio allocation, and at the same time, remaining nimble enough to save one?s self in the event of short term movements.

    Although many financial ?experts? like to make the promise, I have seen little evidence that the ability to accomplish this last goal is possible with any frequency to speak of. The net result is often just more trading costs and taxes with little net profits to show for the effort.

    It seems, again to me, that one makes a choice between a short term vs. a long term portfolio allocation. And in not getting cocky over getting one right every now and then.

    Take care.

  9. Thanks Rob for sharing the simple approach that you are following as an alternative to buy-and-hold. Following this article I have been reading some of your other posts and the articles that you refer to as well.

    Reading this post and what you have written before, I do not completely understand why you stepped out of stocks completely and did not start with a market timing or trend investing approach. Maybe you have explained it somewhere but I could not find it so quickly.

    Note that the coming years of the “new normal” as Bill Gross from Pimco is calling it, 6.5% on average per year will probably only happen in the dreams of buy-and-hold investors.

  10. I do not completely understand why you stepped out of stocks completely and did not start with a market timing or trend investing approach.

    Thanks for taking a look at my stuff and for taking the time to share your thoughts here, Van Beek. I took a quick look at your site too. If I understand things, you advocate short-term market timing. That is, you look for signals as to when stock prices are likely to be going up or down and change your stock allocation accordingly.

    I do not personally believe that short-term timing works, largely for the reasons that Spokane Al puts forward in his post above. This is one re which I am in agreement with the Buy-and-Holders. Please understand that I try hard not to take a dogmatic stance re this. It is entirely possible that I am wrong about this and that you are right. I think that voices like yours must be hard if we are as a society to make sense of all this. The fact that I disagree with you today does not mean that I cannot learn from you and perhaps over time even come around to your position.

    The difference that I see between short-term timing and long-term timing is that I believe that short-term price changes are determined by investor emotion, which are unpredictable, while long-term price changes are determined by the economic realities, which have been stable in the United States for a long, long time.

    The thing that tripped up the Buy-and-Holders is that they looked at evidence that short-term timing does not work and concluded that no form of timing works. When you look at the data to see whether long-term timing (changing your allocation in response to valuation shifts with the understanding that you may not see a benefit for doing so for 10 years) works, you see that long-term timing has permitted far higher returns at far less risk for as far back as we have records (1870). There has not yet been a single case in which paying attention to the price at which stocks are selling before deciding how much money to put into stocks has not produced good results IN THE LONG TERM (there are many cases in which it has not worked well in the short term).


  11. 3.5% annual return? After taxes and inflation its safe to say that your return is actually negative.

  12. 3.5% annual return? After taxes and inflation its safe to say that your return is actually negative.

    The 3.5 number is a real number, Bryan. That’s the return after inflation is considered.

    The TIPS are tax-protected. The IBonds are held in a tax-protected retirement account.


  13. Be careful with TIPS. It uses the government watered down (under) “reported” inflation numbers based on the always controversial CPI.

  14. Bryan – I fully agree with your warning on TIPS. But Rob bought his years ago at higher rates, so he’s sitting well with them regardless of what’s happening now.

  15. Rob, any tips to pass my way?

    I am not invested in anything at the moment – did in the past. The usual 401k, employee stock options and so on. Had to “cash in” all that over the years to survive. I am now age 52, and both my boyfriend (he is 56) are now realizing we should look into some financial “options” besides the savings accounts.

    I would like to start out small.

    I had looked into Aflac because there are no “middlemen” involved in purchasing their stock but the minimum to purchase is $1,0000. Not an amount I want to do right now, we need to purchase another car and saving towards that. Public transportation is great, but is “restricting” our income choices.

    Thank you,

    My Blog: “A Story of Hope”

  16. Rob, any tips to pass my way?

    My “tip” is not to invest in anything unless you understand it 100 percent.

    That’s probably not what you were expecting in a “tip.” But it is my sincere belief that if you take those words seriously they will bring in a lot of money and a lot of peace of mind for you over the years.

    Most of us do not enjoy investing. We do it because we must. It’s like going to the dentist! And that means that we want to get it over with as soon as possible. So we do not want to study anything. We look for something that looks half decent, invest in it, and pray for the best.

    No! This will not do.

    Investing is not hard. You can learn 80 percent of what you need to know in a few weekends and 80 percent is enough for you to obtain perfectly fine returns at very low risk. But you must put those few weekends in! If you are not willing to do that, I think you are better staying with extremely safe investing classes.

    Those who want to limit the amount of time they spend on this (that’s most of us!) and who also want to possess 100 percent understanding of the investment classes in which they are invested obviously need to limit themselves to very few asset classes. That’ what I recommend.

    I suggest you limit yourself to two asset classes: (1) a broad U.S. index fund for growth); and (2) IBonds or TIPS or CDs (as a place to store money at times when U.S. stocks are overpriced). That’s all you need. The three safe asset classes are very easy to understand. Those will take no time at all. So direct your efforts to understanding broad stock indexes, and you are set.

    The #1 thing you need to understand about stocks is that the price you pay for them affects the long-term return you obtain from them. We are likely to see very good prices sometime within the next five years, perhaps sooner than that. I would be keeping most of my money safe until then while educating myself about stocks so that, when those good prices appear, you are prepared to take advantage of them. You are looking for a P/E10 value below 15 (which is fair value). If the P/E10 goes below 10, which is likely, you are gaining an amazing long-term value proposition.

    Do not feel a need to buy quickly. DO feel a need to educate yourself quickly (again, this does not take much time). But then wait until you can buy at a price where the long-term odds are on your side.


  17. I found your site through google while looking for views on 401ks. Thanks for these nice points you make.

  18. Rob,

    Why did you not invest in stocks in March 2007 when the P/E 10 was 14, and could have return the 6.5% average real return that stocks give. Surely, TIPS and IBonds couldn’t have been presumed to return 6.5% real 10 years from the March 2007 perspective. In hindsight, this was the correct move (when considering the S&P 500 in March 2007 compared to today).

  19. In hindsight, this was the correct move (when considering the S&P 500 in March 2007 compared to today).

    It’s not just in hindsight that it was seen as a good move, Azanon. Those who follow a data-based approach saw that stocks offered a strong value proposition at the time. If you listen to any of the RobCasts that I recorded at the time, you will see that I was telling people about the strong long-term value proposition for stocks at that time. I told a friend of mine at Church about the strong value proposition and warned him more recently that the value proposition for stocks is no longer strong. He rode the price rise up and has now cashed in his profits to protect them.

    So stock returns ARE predictable after all! (To be sure, it’s unusual for us to see that big a price swing in so short a time and it can take up to 10 years for Valuation-Informed Indexing to provide good results).

    I did not personally buy stocks at that time because I do not want to hold through the next crash (every time we have gone to insanely high valuation levels, we have dropped to insanely low valuation levels as a result of the economic destruction caused — that would be a 65 percent price drop from where we are today). I am taking on enough risk in my efforts to build my internet business — So I have elected to stick with my TIPS and IBonds paying 3.5 percent real until we have put the Buy-and-Hold Era totally to rest.

    I do believe that those who purchased stocks at the prices that prevailed in early 2009 will do fine at the end of 10 years. But I think the early years of that 10-year period may be a rocky road indeed. Each investor must make a personal choice as to whether he or she wants to be investing in stocks as we live through those rough times.

    The data tells an important part of the story, Azanon. It does not in my view by itself tell the entire story.


  20. No, I don’t think you are crazy for being out of the market. I tend to agree with your assessment that “buy and hold” doesn’t really work in practice. That being said, I think equities can and usually should play a role in an investment portfolio. Of course, you have to be willing and able to “ride out the storm” and deal with the volatility. If you can’t, then stocks are the very last place you want to be.

  21. I don’t invest for capital gains, so I won’t point out how much the stock market has returned since 1996. Besides, it’s true for it’s meandered for years, and is still well below the October 2007 record high.
    So I agree that buying and holding for capital gains is a losing strategy.
    However, your cds have been ground down by inflation. Your ibonds and TIPS should in theory have kept up with inflation, but the urban CPI doesn’t include fuel or food expenses.
    If you’d invested in stocks that pay dividends you’d be receiving much larger quarterly checks now than in 1996.
    So I advocate investing for income, not capital gains, and you’ve done that – but in a less than optimal way. Since equities have a direct stake in the economy, anybody not on the verge of dying soon should have a lot of them.

  22. Richard – Investing for dividends–or buying cash flows–is a hallmark of the wealthy. It stacks the long term in your favor so you don’t have to worry so much about market ups and downs. You can afford to wait out crashes because you have an income on your investment.

    Still, I agree with Rob here that timing is everything. Even if you go with dividend paying stocks you’d still be better of if instead of buying them at Price X, you bought them a Price X MINUS 40%. Not only will the gain in price be generous when stock prices rise, but your return on investment will also be higher.

    Combining the two–buying dividend paying stocks and doing so after a crash–is a rich man’s strategy. Most people worry more about finding investment bargains at market tops, when there are far fewer of them, than a bottoms when they’re all around.

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