An earlier blog entry described the background of some recent e-mail correspondence between Michael Kitces and I on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Micahel on August 27.
That all makes sense.
I come from a journalism background. I think that makes a difference in how I take things in. Here’s a blog entry that I wrote entitled “We Need a Tim Russert in InvestoWorld”:
Financial planners seem highly reluctant to take strong positions and to argue them forcefully and to explore the implications of bold claims or of research that puts forward bold findings.
Here’s a blog entry reporting on something amazing that happened at a recent conference at which Rob Arnott spoke:
Juicy Excerpt: He asked them how many of them believed in the Efficient Market Hypothesis that Woody wrote so cogently and negatively about above. Not one of the academics raised his hand. Then Rob asked how many of them use EMT in their research and assumes it to be true, and nearly every hand was raised.
Can you imagine something like that happening in any field other than investing? These academics do not have confidence in the model they use to construct their research! Yet they continue pumping out studies! And the people who report on the studies do not even take note of this! My view is that this should have been written up on the front page of the Wall Street Journal. There should have been a five-part series exploring all the implications. There should be a national debate as to how we got where we are today and how we are going to make the journey to a better place.
I believe that the Efficient Market Theory/Passive Investing Model is on the way to being entirely discredited. We probably will need to suffer the greatest loss of middle-class wealth in the history of the United States to get us to the point where enough people are willing to talk plainly about these questions for that to happen. It shouldn’t have to be that way! All of this evidences a grave flaw in how the financial planning community goes about doing the important work it does (I certainly intend no personal offense with these words).
Internet discussion boards permit us to see this process play out in an up close and personal way. I have spoken with tens of thousands of middle-class investors on the various boards. I see the same things over and over again. The vast majority are confused as to even the basics of how stock investing works. They are not able to make sense out of what they are told by the experts. They are intimidated from asking common-sense questions because they feel that the experts must know far more than they do and presume their questions are probably stupid ones. But the questions people are struggling with are not stupid at all! They are right on! The experts are not able to provide clear answers to these questions, so they are being put on hold while the danger increases.
I learned all this through my participation in The Great Safe Withdrawal Rate Debate. I have never encountered a single person who could make a rational argument for why valuations should not be taken into account in identifying the safe withdrawal rate. But I have encountered many who are frightened beyond belief that their retirement plans are built on sand and who are as a result intensely hostile to the idea of these questions being explored in depth.
In my eyes this is powerful evidence of the failure of the Old School approach. A sound methodology would inspire confidence, not defensiveness. I have seen defensiveness not only among ordinary investors. I have seen it among experts! I don’t say that as a dig. It is an observation of a reality that I have seen appear before my eyes (to my utter amazement).
I can say something in favor of the experts too. I have seen a good number of them try to express their doubts about the dominant model of today. My sense is that it is beginning to dawn on a lot of people that the ship is about to go under but that lots of people refrain from saying those words out loud out of some sort of fear that saying the words will cause the event to take place (and also out of a fear of the reaction that will be provoked among those not yet ready to acknowledge the reality).
I am a big believer in straight talk, Michael. I have great respect and affection for the experts. I also think that most who are widely viewed as investing experts today have made big mistakes in granting a too easy acceptance to the Passive Investing model for many years now. The safe withdrawal rate issue is only the tip of the iceburg. But it illustrates the problem in a compelling way because the consequences of people using bad numbers to structure their retirement plans are so horrible to contemplate. There are all sorts of reasonable viewpoints on all sorts of particular topics. But there is no question whatsoever that many retirement plans are at grave risk today because the Old School studies were dramatically oversold. I can point you to thousands of posts showing that real live investors have put excessive confidence in the findings of those studies.
If you would like to report on our findings at your site, I am always very happy to help you with any questions or concerns that you have about the New School approach that you might want to work through before doing so. If you would make John’s work known to Guyton and Bengen or any others in the field, I’d be extremely grateful. If you think it would be a good idea for me to present some questions or make a presentation at the conference, I would of course be thrilled to do so.
I think this is the most important story that I have come across as a journalist. I’m grateful for the time you have spent trying to come to a fuller understanding of the New School approach. I very much believe that you are on the right track. I think your research is going to get some people thinking about some things that they very much need to be thinking about. I am confident that it will go down in history as representing an important step in a good direction. That said, it still remains my inclination to do all that I can to push to see the change in thinking that we need to see happen sooner and more forcefully.
As I noted in an earlier e-mail, I think we’ve got a tiger by the tail. Will it give us the most exciting ride of our lives? Or will it gobble us up for even daring to try to climb on its back? The drama that comes with asking taboo questions about retirement studies!