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Stocks Are A Lot Less Risky Than You Think

By Kevin Mercadante on 09/07/2010 – 6:42 pm PDTLeave a Comment

Beyond Buy-and-Hold #3

By Rob Bennett

I explained in last week’s column that Valuation-Informed Indexing offers long-term investors both higher returns and less risk than what they can expect following a Buy-and-Hold strategy. It sounds good, of course. The trouble is — It sounds too good.

Higher returns and lower risk both? If there really were a way to pull that off, everyone would be doing it. No?

I think that’s right. Eventually, everyone will be doing it.

The reason why everyone is not already doing it today is that the Valuation-Informed Indexing option has only been available to us for a few decades. John Bogle founded Vanguard in the mid-1970s and it was Vanguard that put index funds on the map. You cannot practice Valuation-Informed Indexing without index funds. So we have only had this possibility available to us for about 35 years.

And something has been holding us back during that time-period. Buy-and-Hold! For as long as index funds have been available, The Stock-Selling Industry has been pushing Buy-and-Hold hard. It is all we ever heard about in the papers and on the web sites for most of those 35 years.

It is only since the price crash that large numbers of investors have opened up to the possibility of trying something new. Now that people are losing confidence in Buy-and-Hold, an exciting opportunity has opened up to us.

We didn’t know that long-term returns were predictable at the time when Vanguard was founded; that came in 1981, several years later. Now that we know so much more about how stock investing really works than we did when Buy-and-Hold Model was developed, why not develop an approach to index investing that truly makes sense?

Indexing to the rescue

Indexing changes everything. The sad thing is that most indexers (including Bogle) have little idea today just how important an innovation indexing is. The availability of indexes revolutionizes our understanding of stock risk.

And in an entirely positive way. The truth is, stocks are far less risky than even the most enthusiastic stock advocates today realize. For investors willing to invest in indexes and open to taking valuations into consideration when setting their stock allocations, stocks are a significantly less risky asset class than bonds.

Why is it that we think of stocks as risky? It is because the returns they provide are so unpredictable

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Tags: , john bogle, mid 1970s, , term investors, Uncertainty

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