The Magic (and Limits) of Using Data to Guide Your Investment Decisions

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The following is a guest post by Rob Bennett. Rob’s favorite book on investing is Irrational Exuberance. His bio can be found by clicking here. Enjoy!

The Magic (and Limits) of Using Data to Guide Your Investment Decisions
Jacob (the site owner here on My Personal Finance Journey) recently wrote a blog post (“Valuation-Informed Indexing vs. Passive Investing — Which Is Better?”) testing how Valuation-Informed Indexing (the investing strategy I recommend) compares with Buy-and-Hold (the far more popular strategy). 

One sentence jumped out at me: ”I really get a lot of enjoyment out of these types of post that require putting together a spreadsheet, imputing some interest rate formulas, and analyzing large amounts of historical data. Maybe it is the scientist in me that enjoys this!”
It made me happy to hear those words. In one sense, I am the last person on earth anyone would accuse of being a “scientist.” There’s one thing my critics say about me that is 100 percent on the mark. They say that I am afraid of “big scary numbers.” That’s so. I am strictly a words guy.
There’s another sense, though, in which I strongly relate to what Jacob said. I don’t enjoy putting together spreadsheets. But when it comes to investing, I believe that looking at the numbers is critical.
Whenever I find myself saying something negative about Buy-and-Hold (which is often!), I make it a point to add a mention somewhere of how much respect and affection and gratitude I feel for the Buy-and-Holders. One of the reasons I feel this way is that I believe so strongly that they are on the right track in arguing in support of data-based, research-supported investments strategies.
I didn’t develop the Valuation-Informed Indexing model because I was sitting around one afternoon with nothing better to do. I first got interested in what many have come to refer to as my “obsession” because I was planning to leave a high-paying corporate job at age 43 to build an internet business. My wife is a stay-at-home mom who homeschools our two boys. So, I have financial responsibility for four people. 
It would have been an act of supreme irresponsibility for me to hand in a resignation without first being absolutely sure that I had sufficient savings to cover my family’s costs of living for a good number of years to come. 

During those years of examining every book I could find on the subject, I was hit with one frustration over and over again. All of the books say different things! 
What good does it do to consult with experts if for every expert opinion there is an expert counter-opinion on the same topic? I began to think that I could devote 20 years to the study of investing and end up not knowing with certainty anything more than I knew the day I started. 
Then, I discovered the Buy-and-Holders. Then, I discovered the magic of data-based investment strategies.
Opinion is just not good enough when you are putting your retirement money at stake. You need something hard to go on, you need something objective and real and factual in your corner. The Buy-and-Holders have that. The proponents of the other investment strategies do not. 
That’s why people like John Bogle, Bill Bernstein, and Scott Burns became my lifelong friends in the days when I was putting together my Retire Early plan. The other stuff goes around and around in circles. When I studied the work of the Buy-and-Holders, I found myself enjoying forward motion in my efforts to learn how stock investing really works.  
Why? Because Buy-and-Hold is rooted in data. It’s objective. It’s science. That’s what keeps the Buy-and-Holders honest. That’s the magic of the thing.
Now —
The job cannot be done using only numbers. Investing is in part a mathematics game but it is also in part an emotions game. Emotions cannot be reduced to numbers. 
As I have come to have differences with my Buy-and-Hold heroes, I have come to believe that their big mistake is in thinking that the numbers alone can tell them what they need to know to become successful investors. I have come to believe that many Buy-and-Holders live in fear of emotions as much as people like me live in fear of numerical calculations. 
I believe that there is going to come a day when the numbers people and the emotions people are going to see how much it would be to their mutual benefit to combine skill sets and thereby achieve advances that neither group could ever hope to achieve on its own. The numbers guys (and gals) really do hold an important piece of the puzzle. The emotions gals (and guys) really do hold another important piece.
For example, I believe it would be a big plus for Buy-and-Holders to direct more effort to studying how big a loss of portfolio value most investors can bear before they feel forced to sell stocks. Buy-and-Holders have never lived through a major bear. Should they be prepared for a loss of 50 percent? Or is a 60 percent loss possible, given how high valuations went in the late 1990s? 70 percent? 80 percent? 
Buy-and-Hold will work for investors who really do hold through an entire bear market. But how realistic is it to expect that most of us will be able to do so? This is the sort of question which I believe has received insufficient attention from Buy-and-Holders, largely because answering it in a complete way requires directing attention to both numerical and emotional aspects of the question.
Our understanding of how stock investing works is going to take a big leap forward when we get the two sides talking to each other and we see all the important pieces finally clicking together. 

How about you all? What type of investing strategy do you employ? Have you ever looked in to the Valuation-Informed Indexing approach to investing? If so, what did you think? 

Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

  • Great article here Rob! Thanks again so much for sharing it with us.
  • I did thoroughly enjoy comparing Valuation-Informed Index Investing with the various fixed asset allocation passive investing portfolios in the post on my site a while back. Thanks also for all your great comments and feedback on that post!
  • @ Clarification between the “passive investing” (what I currently do) and “Buy-and-Hold” strategy labels –
    • There’s really only one thing I want to add to this article, and that is some clarification about the nature of several of the investing styles mentioned above – “passive investing” and “Buy-and-Hold“.
    • I’ve noticed over the past year and half of blogging that sometimes, there is confusion about passive investing and Buy-and-Hold being the same thing. While this could just be personal preference in how different individuals define things, I just wanted to write some clarification here to let everyone know how I interpret this subject.
    • To me, Buy-and-Hold is an ineffective strategy involving buying shares of a single asset-class index mutual fund and holding them indefinitely (or until retirement), hoping they will go up. For example, Buy-and-Hold would be if you were to purchase one share of an S&P500 mutual fund and hold on to it through thick and thin until you retired.
    • Passive investing, on the other hand (again in my interpretation), is something entirely different. In passive investing, I elect a target asset allocation (25% fixed income, 75% equities is my current asset allocation) and then initially buy index mutual funds to obtain this asset allocation.
      • As market fluctuations occur, instead of holding indefinitely (as in Buy-and-Hold), I actually rebalance through buying and selling shares as needed to maintain my target asset allocation levels. To do this, I review my portfolio once per month, and rebalance if I am outside of a +/- 5% band.
      • And, as I age through different stages of life, I change my target asset allocation to a more conservative level (higher fixed income percentages).
      • While this strategy is far from perfect, it’s the most convincing strategy I’ve found to-date.
    • So, as you can see, in my opinion, Buy-and-Hold’ing is much different than passive investing.
    • There is, however, a time when Buy-and-Hold and passive investing (in my definitions) would overlap. This would be when someone chooses to purchase a single solution asset allocation mutual fund or investing option that holds both fixed income and equity securities and handles rebalancing for you. Examples of this would include Target Retirement Date Funds and services like
      • Since the fund handles rebalancing for you, you can actually buy-and-hold these shares without worrying as much that you bought “too low” or “too high”.

***Photo courtesy of


  1. Thanks for posting the article and thereby helping to get some discussion started, Jacob. You have been super in this regard on numerous occasions.

    As your notes suggest, there is a great need for clarification of terms in this field. I often hear people appear to be in disagreement only because they are defining terms differently. That's most unfortunate. We all could dispel a lot of confusion by being more clear about the terms we use.

    I am a big fan of what you describe as “Passive Investing,” with one huge exception. I don't view it as “passive” to rebalance. Those who rebalance are deliberately staying at the same stock allocation. My view is that the goal of Passive Investing should be to stay at the same risk level. Since the risk associated with stock investing changes with changes in valuation levels, I believe that the only way to be truly passive is to change your stock allocation in response to big valuation shifts. The thing that I aim to be passive about is not my stock allocation but my risk level.

    It all comes down to how you interpret Bogle's injunction to “Stay the Course!” Bogle has said this is his most important piece of investing advice. Is it those who stay at the same stock allocation (by rebalancing) who truly Stay the Course or is it those who change their allocations in response to valuation shifts with the aim of keeping their risk levels roughly constant?

    My recent post Beyond Buy-and-Hold #55 — “I Don’t Think I’ve Ever Heard Buy-and-Hold Described as a ‘Get Rich Quick’ Scheme Before”

    • That's a valid point Rob. I'll definitely be on the look-out for a designed strategy to incorporate PE10 to my investing plan as the VII strategy evolves.
      My recent post The Magic (and Limits) of Using Data to Guide Your Investment Decisions

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