Six Dangerous Investing Myths

By in Advanced Investing, Asset Allocation, Bond, Guest Post, Investing, Stocks | 12 comments

Guest post, Rob Bennett

Investing is both an art and a science. There are passionate supporters of a wide range of investing methodologies and the research can be tweaked to support various approaches. 

When considering the index fund investing approach, there are considerable ways to view the idea that it’s difficult if not impossible to beat the long term market averages. Following are several investing myths, from a valuation informed approach. 

What do you think of these investing myths, are they accurate or not?

Six dangerous #investing myths.

Valuation Informed Indexing Approach

Mr. Bennett advocates Valuation-Informed Indexing. This strategy calls for the investor to increase his stock allocation when prices are low and to decrease his allocation when prices are high. The concept is rooted in the research of Yale Economics Professor Robert Shiller, who found that, contrary to the widespread belief that market timing doesn’t work, long-term returns are predictably poor starting from times of high valuations. 

Fact or Fiction? Valuation Informed Investing Myths

Set forth below are six items of investing wisdom viewed as truths by Buy-and-Holders but as dangerous investing myths by those who root their strategies in Nobel Prize winner, Robert J. Shiller’s research findings: 

Investing Myth 1 – Market Timing Doesn’t Work. Buy-and-Holders believe that the market is efficient; that is, all information known to affect the market price is incorporated into it at all times. It follows that market timing cannot work; no one can effectively guess how unforeseeable events are going to play out. 

Valuation-Informed Indexers believe that investor emotions are the primary influence on prices in the short term and that economic realities become dominant only after the passage of 10 years or so. If this is so, long-term returns are highly predictable (prices move in the direction of fair value). Under the new understanding of how stock investing works, timing is not only possible but required; investors who fail to change their stock allocations in response to big price shifts thereby permit their risk levels to get wildly out of whack. 

How to Invest and Get Rich Slowly>>>

Barb’s comment; Actually, maintaining a constant asset allocation will do this for you. When one asset class becomes overvalued, you will rebalance by either selling the overvalued asset class or putting future cash into lower valued assets.

Investing Myth 2 – Economic Developments Cause Stock Price Changes. Did you know that Shiller predicted a former economic crisis? So did Robert Arnott. So did Andew Smithers. So did every stock analyst who takes Shiller’s findings seriously. How did they perform this magic feat? Valuation-Informed Indexers don’t believe that it is economic developments that cause stock price changes but that it is stock price changes that cause economic developments. The market was overpriced by $12 trillion in 2000. The inevitable return to fair value was going to cause a loss of that amount of buying power from our consumer economy. The crisis became unavoidable once we permitted the bull market to get so out of control. 

Barb’s comment; There were indications of an overvalued market before the August 2015 market crash, as well.

Investing Myth 3 – The Safe Withdrawal Rate Is a Constant Number. Financial planners use the concept of the “safe withdrawal rate” to tell us how to structure our retirement plans. The idea is to use the historical return data to determine what withdrawal rate would work even in a worst-case scenario. The conventional studies are rooted in the pre-Shiller research and thus do not consider the effect of the valuation level that applies on the day the retirement begins. Studies that do consider valuations come to wildly different conclusions as to what is safe. In the event that Shiller is right, millions of middle-class people will be experiencing failed retirements in days to come. 

Investing Myth 4 – Stocks Are More Risky Than Bonds.This has been the conventional wisdom for a long, long time. But risk is uncertainty. If Shiller is right that long-term returns are highly predictable, stocks are not nearly as risky as we have long believed them to be. If Shiller is right, stocks are a high-risk asset class only for those who don’t take valuations into consideration when setting their stock allocations — that is, Buy-and-Holders. 

Barb’s comment: Modern Portfolio research defines risk as volatility. In other words, how much your asset value moves  up and down in price. In general, stocks are more volatile than bonds, although over the long term they have offered much higher returns than bonds. Warren Buffett suggests that risk is running out of money in retirement.

Investing Myth 5 – Super-Safe Asset Classes Are a Poor Choice for Long-Term Investors. The conventional wisdom is that stocks are always best for the long -term investor and super-safe asset classes never provide returns high enough to finance a comfortable middle-class retirement. But a regression analysis of the historical return data showed that at the prices they were selling at in 2000 stocks were likely to provide an annualized return of something in the neighborhood of a negative 1 percent real. In contrast, Treasury Inflation-Protected Securities (TIPS) were at the time paying 4 percent real. That’s a return differential of 5 percentage points per year for 10 years running — a total shortfall for the stock investor of 50 percent of his initial portfolio value. 

Read more: Is Buy and Hold Finished?>>>

Investing Myth 6 – Stocks Have Become a Good Buy in the Wake of the Price Crash. There were three times prior to the late 1990s when stock prices reached insanely dangerous (high) levels. On each of those three occasions, the damage done to the economy as a result of the inevitable crash ultimately caused stock prices to fall to one-half of fair value. That’s a price drop of 65 percent from where we stand today (February, 2011).

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The information contained in this article is the opinion of the guest author and does not necessarily represent that of Barbara Friedberg. Do not construe this information as a recommendation to buy or sell particular securities or asset classes.     

This is a guest post by Rob Bennett who created the first retirement calculator that contains an adjustment for the valuation level that applies on the day the retirement begins. His bio is here

Barb’s question: Do you consider valuations when making investment decisions?

A version of this article was previously published.


  1. Modern Portfolio research defines risk as VOLATILITY.

    Thanks, Barb, both for running the guest post and for offering your own comments. Those comments help people think things through for themselves by highlighting the implications of the two models.

    I just want to clarify that Valuation-Informed Indexing rejects Modern Portfolio Theory. You are accurately describing what MPT says. I am describing an entirely different model for understanding how stock investing works.

    The same point applies re your comment that rebalancing helps to keep your risk profile stable. Again, that is indeed what MPT says. The VII Model rejects that foundational premise. Under the VII Model, it is not enough to rebalance to the old stock allocation. You must change your stock allocation in response to big price swings.

    It might help for people to consider the sub-title of Shiller’s book Irrational Exuberance, The subtitle is: “The National Bestseller That Revolutionized the Way We Think About the Stock Market.” Shiller’s research cannot be reconciled with Modern Portfolio Theory. He is pointing to a new way of thinking about how stock investing works.

    I certainly understand that lots of good and smart people believe in the MPT today. My hope with posting guest blogs of this nature at different blogs is to let people know that there is an entirely different model out there also believed to be right by a good number of smart and good people. We need to hear from both sides so that over time we can form a consensus as a society re which model is the one that best describes reality.

    Many people today do not even realize that there is 30 years of academic research contradicting the premises of the MPT. I am trying to get the word out about that. I respect and admire the people who came up with MPT for the important contributions they have made. But I am trying to launch a national debate on the merits or lack thereof of the new model so that we can all move forward with greater confidence that the model we are using to form our investing strategies really does make good sense.


    Rob Bennett

    February 23, 2011

  2. Rob, Thank you for writing in and offering additional clarification. Shiller is obviously a superstar of the Economics/Finance world. Your additional comments certainly add to the discussion. You have offered a new view into an old and well established theory. Certainly, worth investigating!


    February 23, 2011

  3. Do you take into account all the taxes and transaction fee your model will have to pay?
    Are you changing your allocation in response to all the unrest in the Middle East currently?


    February 23, 2011

  4. Although I have maintained an asset allocation that is fairly broad, I constantly have to remind myself that there things I can not control. For example, the unrest in the Middle East.


    February 23, 2011

  5. Do you take into account all the taxes and transaction fee your model will have to pay?

    Thanks for your question, RetireByForty.

    There are no extra fees that come with following a Valuation-Informed Strategy. People get confused about this because they hear the word “timing” and think that it means making frequent shifts, perhaps each time there is some economic or news development. That’s not at all what VII is about.

    The Buy-and-Holders determined that short-term timing doesn’t work. That was a huge advance. In no way, shape or form am I trying to say that they were wrong about that. Valuation-Informed Indexers never engage in short-term timing, We never try to guess where the market is headed over the next year or two or three. That’s out. So are the fees that follow from adopting that sort of strategy.

    From 1975 through 1995, stocks were selling at low or moderate prices. So Valuation-Informed Indexers were going with a high stock allocation for that entire time-period. From 1996 through late 2008, stocks were selling at insanely high prices. So Valuation-Informed Indexers were going with a low stock allocation for that entire time-period.

    On average, you need to make an allocation change once every eight to ten years. That doesn’t cause any more fees than those that follow from regular rebalancing.


    Rob Bennett

    February 23, 2011

  6. Are you changing your allocation in response to all the unrest in the Middle East currently?

    No. Valuation-Informed Indexers pay zero attention to such things (as investors — we of course care about these things as citizens).

    If Middle East unrest were to cause a stock crash, THEN we would change our stock allocations. Lower prices would improve the long-term value proposition for stocks. So we would increase our stock allocations.


    Rob Bennett

    February 23, 2011

  7. Thanks Rob.
    Makes more sense now if you only change allocation every 8 to 10 years. You’ll still have to pay a lot of tax when you do though. With the MPT asset allocation, it’s easy to adjust asset allocation with just contributions since the changes are not huge.

    I’ll have to put Shiller’s book on my reading list. You are doing a good job at converting me to the VII model. 😉


    February 23, 2011

  8. You are doing a good job at converting me to the VII model.

    That makes me happy, RetireByForty. I really just want people to know that there’s an alternative out there. So long as people know about all the possibilities open to them, I am confident that things will work out for the best.

    I’ll have to put Shiller’s book on my reading list.

    It’s a very good book. I put it up there with “A Random Walk Down Wall Street” and “Stocks for the Long Run” and “Common Sense on Mutual Funds.” It’s clear that many years of thought and work went into it. I believe that people will be talking about Shiller’s ideas for many years to come.


    Rob Bennett

    February 23, 2011

  9. Thanks for your kind words, CD Rates Pro. They brought a nice measure of cheer to my Sunday morning.


    Rob Bennett

    February 27, 2011

  10. I’m starting in Business investment and I am researching and found post know, this information will help me a lot, thanks


    October 3, 2015

  11. Although I have maintained an asset allocation that is fairly broad, I constantly have to remind myself that there things I can not control. For example, the unrest in the Middle East.

    Jerry Costa

    January 3, 2016

    • Hi Jerry, Since we don’t know what the future holds and there’s lots we can’t control, that’s where diversification comes in. We’re all assuming that over the long term, U.S. and international companies will prosper and investors will benefit. In the short term, it’s a ‘crap shoot’. Thanks for writing in.

      barbara friedberg

      January 4, 2016


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