Rob Bennett, Co-Developer of "The Stock-Return Predictor."

Note from Jan: I don't necessarily agree with all of Rob's conclusions, but I thought you might enjoy his viewpoint.

Timing doesn't work. How many times have you heard that bit of investing advice?

It's true in some ways. And it's an important truth.

It's false in some ways too. And the ways in which the claim that "timing doesn't work" is false are just as important as the ways in which it is true.

It's true that it is not possible to know how stocks are going to perform in the next year, the next two years, or the next three years. Many people take guesses and the media devotes lots of energy to letting us know about those guesses. The informed view is that all of the speculation is pretty much a big waste of time. No one knows. Smart investors know that no one knows and don't permit the latest guesswork trip them up on the road to becoming successful long-term investors.

There's another side to the timing question, however. It's not possible to know how stocks are going to do in one year or two years or three years. It is possible to form a good idea of how stocks are going to do in 10 years or 20 years or 30 years. The same historical stock-return data that shows that short-term timing does not work also shows that long-term timing does work. In the long term, stocks perform in largely predictable ways.

It's not just me who says that. Vanguard Founder John Bogle says it. So does William Bernstein, author of "The Four Pillars of Investing." So does Andrew Smithers, co-author of "Valuing Wall Street." So does Robert Shiller, author of "Irrational Exuberance."

John Walter Russell (owner of the www.early-retirement-planning-insights.com site) and I have developed a calculator that lets you look at what a regression analysis of the historical data says is likely to happen to S&P stock returns over the next ten years. The numbers are not encouraging. The most likely 10-year return is 0.67 percent (at the price level that applies in July 2007, when this article was written). The most likely 20-year return is 2.27 percent. You can beat those numbers with asset classes that are a whole big bunch safer than stocks.

The problem is that valuations went so high in the late 1990s that it is taking a long time for stocks to get back to the price levels where they again provide the usual annual real return of about 6.5 percent. We'll get there, however, and, when we do, stock investing for the long term will be fun again.

The key today is to learn about the realities of how valuations affect long-term returns. Those who know what is going on will not be shocked when stock prices do not move up significantly for a good bit of time. It is only by being informed that we can hope to develop the confidence in the long-term performance of stocks needed to become true buy-and-hold investors.

I think it makes sense to lower your stock allocation a bit too, and then to increase it again when the long-term value proposition improves. Forget short-term timing. But don't make the mistake of going so far to the other extreme that you start thinking that the word "time" itself is a four-letter word.

Making smart allocation changes when prices get too high can get you to financial freedom a lot sooner than is possible for those who always stick with the same allocation. That's what it's all about, isn't it?

The Stock-Return Predictor is available free at Rob's web site.

http://www.passionsaving.com/stock-valuation.html