2/3/2018 A ‘Buy and Hold’ Approach for People Spooked by the Market Tumble - WSJ

DOW JONES, A NEWS CORP COMPANY

DJIA 25520.96 -2.54% ▼ S&P 500 2762.13 -2.12% ▼ Nasdaq 7240.95 -1.96% ▼ U.S. 10 Yr 0 32 Yield 2.841% ▼ Crude Oil 65.06 -1.12% ▼

This copy is for your personal, non­commercial use only. To order presentation­ready copies for distribution to your colleagues, clients or customers visit
http://www.djreprints.com.

https://www.wsj.com/articles/a­buy­and­hold­approach­for­people­spooked­by­the­market­tumble­1517612099

MARKETS

A ‘Buy and Hold’ Approach for People
Spooked by the Market Tumble
Regular portfolio rebalancing can prevent risky assets like stocks from dominating any account

The day's stock market losses are shown on a television screen above the loor of the New York Stock Exchange shortly after
the closing bell on Friday. PHOTO: LUCAS JACKSON REUTERS

By Spencer Jakab
Feb. 2, 2018 5 55 p.m. ET

Is this the top?

Following a 1,096-point weekly decline in the Dow Jones Industrials that culminated in the
largest one-week point drop since late 2008, it’s natural to ask. The question, however, isn’t
particularly helpful.

Investing legends who have built vast fortunes by patiently harnessing the magic of compound
interest have said that ad nauseam. Not only are the market’s turning points unknowable but
just trying to guess them is dangerous to our bottom line. Mutual-fund manager Peter Lynch
warned that “far more money has been lost by investors preparing for corrections, or trying to
anticipate corrections, than has been lost in corrections themselves.”

This is more than folk wisdom from someone with a lot more money than most of us. Studies
routinely show that individual investors lose over a percentage point a year through timing
errors. The months when retail investors lag behind the market the most tend to be when
stocks are the most volatile, suggesting they have sold at inopportune times.

There surely will be some friend or neighbor bragging about having taken some or all of her
money out of the market recently. She may even be telling the truth. The thing is, though, for
every person who thought the market’s relentless march higher was a danger sign, there are 10
who sold earlier in this nearly nine-year-long bull market.

The smart approach centers on regular portfolio rebalancing. Without that, risky assets
like stocks would grow to dominate any account over time. The key is to do it on an
arbitrary date rather than when we are feeling fearful or greedy, since human instincts are
generally wrong. Services like robo advisers or target-date funds will implement this mild form
of market timing in a cheap and tax-efficient way.

https://www.wsj.com/articles/a-buy-and-hold-approach-for-people-spooked-by-the-market-tumble-1517612099 1/2
2/3/2018 A ‘Buy and Hold’ Approach for People Spooked by the Market Tumble - WSJ
But is the “rebalance and forget it” approach the best possible one? Not necessarily, and this
might be one of those times when it pays to take more chips off the table than usual. While there
was plenty of anecdotal evidence in recent months that the stock market was frothy, there are
objective ways of measuring that.

One more reliable than most is the cyclically adjusted price/earnings ratio popularized by Yale
professor and Nobel Prize winner Robert Shiller. Less prone to distortion than short-term
valuation measures since it spans a decade and adjusts for inflation, the measure shows that
U.S. stocks have been more expensive than today only about 2% of the time going back to 1881.
Even after Friday’s 666-point tumble, stocks are pricier now than before the Great Crash of
1929.

While Mr. Shiller himself cautions that his P/E ratio is no market-timing tool or crash indicator,
he says it explains about a third of future U.S. stock returns. Going back to the late 1920s, stocks
have performed more poorly on average over a decade when the Shiller P/E was high and better
when it was low. The S&P 500 has notched an annual five-year total return, reflecting price
gains and dividend payments, of negative 0.4% on average when the Shiller P/E was in the
highest 10% of readings historically, as it is now, and positive 16.2% following the lowest 10th of
readings.

While that difference is huge, reacting to valuation reeks of market-timing to many in the buy-
and-hold crowd. One exception is Elm Partners, which offers low-cost, tax-efficient passive
investment like a robo adviser but with an eye on the riskiness of stocks. Chief Executive James
White says Elm’s allocation to U.S. equities is now just 18% compared with a base level of 38%
because of their own value measure, which is similar to the Shiller P/E.

Calling the top is nearly impossible, but calling markets toppy and reacting accordingly may
not be.

Write to Spencer Jakab at spencer.jakab@wsj.com

Copyright ©2017 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non­commercial use only. To order presentation­ready copies for distribution to your colleagues, clients or customers visit
http://www.djreprints.com.

https://www.wsj.com/articles/a-buy-and-hold-approach-for-people-spooked-by-the-market-tumble-1517612099 2/2