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The Future of Stock Market Investing?

By Kevin Mercadante on 08/31/2010 – 6:54 pm PDTLeave a Comment

Valuation-Informed Indexing Is the Future of Investing

By Rob Bennett

You have recently been sent to Earth from your home planet of Mars and know nothing of what people here have for years been saying about stock investing in the papers and magazines and web sites. You have some money to invest. You have only had time to do enough research to learn a single important fact about stock investing: The average long-term return in the U.S. market is 6.5 percent real.

What do you do? You follow a Buy-and-Hold strategy. You put most of your money in stocks and count on the long-term realities to pay off for you. You make an effort to tune out the short-term noise. You stick with stocks for the long run.

That’s where most of us stand today. We know one important and true thing about stock investing: Stocks are unpredictable in the short term but they always do well for those willing to wait long enough.

What if that didn’t work?

Now say that you have time to do enough research to learn a second important fact: Throughout history, stocks have always provided strong intermediate-term (10 or 15 or 20 years) returns when priced at fair value or less and have always provided poor intermediate-term returns when priced at the sorts of valuation levels that have applied from 1996 forward.

Now what do you do? You don’t follow Buy-and-Hold anymore. You follow a modified form of Buy-and-Hold, a form of Buy-and-Hold that we might call Buy-and-Hold 2.0.

You still make an effort to tune out the short-term noise and to stick with your strategies for the long run. But you keep in mind that it is not only the distant long run (30 years out) that you need to be concerned about. How stocks do in 10 years and 15 years and 20 years matters too.

A bankable alternative

Knowing two important facts about how stock investing works, you don’t practice Buy-and-Hold. You practice — Valuation-Informed Indexing. That’s the investing strategy that I recommend in this column. That’s the investing strategy that I believe will replace Buy-and-Hold.

Buy-and-Hold is rooted in a belief that obtaining the average stock return is good enough. The average stock return is 6.5 percent real

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Tags: planet of mars, term noise, valuation levels

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