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May 17, 2012

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Indexing is based on the idea that fees matter, whereas this strategy is based on the idea that price matters.

I love that statement!That's a perfect description of what Valuation-Informed Indexing is all about.

I don't agree with the idea that changing one's stock allocation in response to valuation swings is not market timing. If you are changing your stock allocation because of expectations of how stocks will perform in the future, you are timing the market. That's the definition.

I think the reason why those who advocate doing this are often reluctant to use the word "timing" is that market timing has gotten a bad reputation because of decades of publicizing of the research showing that short-term timing never works. P/E10 provides no help at all with short-term timing. Short-term timing really doesn't work. What we are talking about with P/E10 is long-term timing. There is just as much research today showing that long-term timing always works as there is showing that short-term timing never works.

Instead of pretending that making allocation changes based on P/E10 is not really timing, we should be emphasizing the critical distinction between short-term timing and long-term timing. We need to continue to warn of the dangers of short-term timing while stressing to investors that long-term timing is essential for those hoping to have any realistic hope of long-term investing success.

Rob

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