An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on October 19.
Thanks for touching base. I am always glad to hear from you. As you note in your e-mail, I have always found your comments helpful and valuable. And, yes, we do agree on much re both the safe withdrawal rate (SWR) issue in particular and re the investing project in general. As the thrust of your e-mail suggests, we do not agree on everything. I certainly see no reason why that should mean that we cannot remain friends or that we should not continue to learn from each other by sharing out thoughts and perspectives with each other.
How did the message-board comment come to your attention? Did you note the tactics employed at the message board at which this comment appeared to intimidate those posting honestly on the SWR topic? How do you feel about what you see when you look at the content of that board?
This question goes to the heart of what we are discussing here. I think it would be fair to say that the people posting abusively at that board are in great pain. The owner of the board is John Greaney, the author of one of the Old School SWR studies. John is a friend of mine. John started the Retire Early board at the Motley Fool site and I built that board into the most successful in the history of the Motley Fool site. When I posted about the problems with the Old School studies, John freaked out. He has now spent the last six years of his life going from discussion board to discussion board, from blog to blog, to insure that no one on Planet Earth can discuss SWRs in a reasonable manner. Does this seem to you to be a constructive use of John’s time? It sure does not seem like such to me.
Everyone who has looked seriously at this issue has come to the same conclusion. The Old School studies tell us the Historical Surviving Withdrawal Rate (HSWR). There is no question whatsoever that they report this number accurately. It is equally obvious that they do NOT report the SWR accurately. To identify the SWR, one must take the effect of valuations into account. William Bernstein said once that anyone giving thought to using one of the Old School studies to plan a retirement would be well-advised to “FuhGedDaBouDit!” I think it would be fair to say that Bernstein does not believe that the Old School studies report the SWR accurately.
Yet, like you, Bernstein is reluctant to say the words that need to be said — “The Old School studies are analytically invalid for purposes of determining the SWR and need to be corrected immediately.” Asked directly whether the Old School studies are analytically invalid, Bill said that it is his view that they ARE analytically valid. That’s the state of play on this question today. There are others who have said similar things. Scott Burns has reported on the New School SWR findings in three of his columns. Yet he continues to link to the Old School studies. He told me once in an e-mail (which he permitted me to publish at my blog) that he views my claims that the Old School studies get the number wrong and need to be corrected as “catastrophically unproductive.” I could go on and on.
I have not quoted you incorrectly. I do not even quote you in the words you cite in your e-mail. I say that “Michael Kitces also said something along these lines…” I published the full text of your e-mail at my site so that anyone who wants to check the precise wording may do do. I have been as fair to you as I can possibly be and I will of course continue to be — I view it as critical that journalists work hard to be fair. Do I have your permission to publish the text of your new e-mail at my blog? Doing that provides you a perfect way to get your precise message out to people in the precise words that you want to use to convey it. Please just let me know and I will be sure to do that.
I am unable to make sense of your lack of alarm over the effects of the Old School studies on real live investors, Michael. We talked a bit earlier about the need to abandon the Passive Investing model now that it has been discredited. It is the sort of confusion you are pointing to in your e-mail that convinces me so strongly that the Passive Investing model simply must be abandoned if humans are ever again to make sense of the investing project. This model is rooted in confusion (the idea that it is not necessary for investors to adjust their stock allocations when prices go to dangerously high levels is obviously based on a premise that valuations do not affect long-term returns and this premise has been rejected by most of the best-informed experts in the field) and the longer we try to make sense of things without putting the discredited model behind us, the more confused things get.
You have agreed that people will suffer losses because of the Old School studies, right? That’s obviously a bad thing, right? So why don’t we all get about the business of fixing them? There are millions of people who have used these studies to plan their retirements. These retirements are at grave risk of failing in days to come in the event that stocks perform in the future anything at all as they always have in the past. Are you able to think of any possible constructive purpose served by failing to get the word out to people as quickly as this can possibly be done?
I asked you this question in one of my earler e-mails and you did indeed say in your e-mail of August 24 that: “I still feel compelled to show some respect to research implying a safe withdrawal rate that really WOULD have genuinely survived every historical scenario our markets have ever actually followed.” You have said that you respect this research, Michael, and that your respect for it holds you back from doing more to warn people of the dangers of planning a retirement by making reference to it. Is this not a fair statement?
There’s a point to which I share your respect for the Old School research. The Old School research was a big advance over what was available to us before it came along. Bernstein described it as “breakthrough research” and I share that view. But, as I noted in an earlier e-mail, humankind learns by discovering things it has gotten wrong and moving forward. We learned that the Old School studies get the SWR wrong back in May 2002 (or arguably even before that). Our failure to spread the word far and wide about the analytical errors in these studies has slowed progress on the development of New School research. Are you able to think of anyone who benefits from this delay in our Learning Together experience? I sure am not.
You note in your e-mail that the New School research is rooted in theory. This is obviously so. ALL research is rooted in theory. The Old School research is rooted in theory too. The difference is that the New School research is rooted in a perfectly reasonable theory (that the SWR changes with changes in valuations) while the Old School research is rooted in a perfectly absurd theory (that the SWR is the same for retirements beginning at wildly different valuation levels). Bernstein said that the Old School studies have “embedded” within them an assumption that the average return of 6.5 percent real applies at all times. I know that you do not believe this to be so. So it logically follows that you do not accept the theory behind the Old School research. It might be reasonable to say that the New School theory has not been proven beyond any reasonable doubt (I think it has been, but I think a case can be made that it is not entirely unreasonable to believe otherwise). Any weaknesses detected in the New School theory do not do anything to address the obvious flaws in the Old School theory. We have very good reason to believe that the New School theory proves out. We know with certainty that the Old School theory is false. Are you able to point to any sliver of evidence whatsoever that valuations have ZERO effect on long-term returns (the Old School studies make no adjustment for valuations whatsoever)?
The title of the book that I am working on is “Investing for Humans.” I am a big believer in the merit of bringing things down to the human, practical level from time to time. I have discussed the flaws of the Old School studies at numerous discussion boards. I have heard positive comment from hundreds of middle-class investors. A good number have avoided the busted retirements that are almost certainly going to follow from use of the Old School studies by taking advantage of the research done in the Retire Early and Indexing communities over the past six years. Despite all that, there are a number of Goon posters who have led a vicious Campaign of Terror against these board communities in an effort to block honest examination of the SWR topic. Honest posting has been banned at the Motley Fool site, the Early Retirement Forum, the Morningstar.com site, and the board at Bogleheads,.org. What do you make of this? I think it is fair to say that it says something very troubling about the Old School research and about the Passive Investing mindset that prompted the analytical errors made in it and that encourages an attitude of indifference to the need for publicizing those errors and what we have learned from our discovery of them.
When real live people try to determine the SWR today, they often find themselves looking at the findings of the Old School studies. These studies make zero adjustment for valuations. Do you see this as a good thing or as a very, very, very bad thing? I think it would be fair to say that that is the root question here. I obviously see it as a very, very, very bad thing. My goal in getting the Old School studies corrected is to open up the field for discussion of the New School research. I obviously have no problem with the discussion of any weaknesses identified in the New School research. I encourage this strongly. But I do think it is imperative that the New School research be widely publicized before more middle-class investors experience more busted retirements as a result of the demonstrably false claims of the Old School research.
You use the phrase “empirical fact” in connection with the Old School studies. Surely you do not mean to suggest that the Old School studies get the SWR right as a matter of “empirical fact.” I presume that you are saying that the Old School studies report the Historical SURVIVING Withdrawal Rate as a matter of empirical fact. We of course agree on this point. I am not aware of anyone ever disputing the point. Can we get past this trivial point and focus our attention on the need to warn the many people who have been taken in by the false claim that it is possible to identify the SAFE withdrawal rate without taking valuations into account? We are in agreement that this is not possible, no?
I certainly stand by my statement that your blog post will do a lot of good for a lot of people. You may recall that my initial blog post about your research described you as being half in the Old School and half in the New School. My goal is to get you entirely over to the side of the good guys! We need you, man! If you would like to pursue this in further e-mail correspondence for publication at my blog (and at yours too, if you like), I am all for it. People need to see more of these sorts of discussions to make sense out of this critically important issue. If you would like to publish an article or research at my site, I am also happy to make my pages open to you to do so. I offered in an earlier e-mail to speak to the SWR conference that you will be moderating. It seems to me that that conference represents a great opportunity to get these ideas out before more of today’s SWR “experts” and to see how they respond. I have studied this matter in great depth. It amazes me how much trouble many incredibly smart people have grasping some issues which to me seem basic. It’s an exceedingly odd phenomenon. I have come to believe that the root problem is the confusion caused by even partial acceptance of the Passive Investing model. In any event, I am completely open to doing anything that I can to help people come to a better understanding of the underlying realities (and I of course am grateful for the learning experiences that I inevitably enjoy myself when I am graced with an opportunity to interact with people who come at these questions from a somewhat different perspective).
I do not believe that I have been even a tiny bit unfair in my descriptions of your viewpoint, Michael. However, I am completely fine with the idea of publishing both your e-mail and my response to it so that people can take a look at your own characterization of your viewpoint and decide for themselves whether I have in some way indeed been unfair or not. I would like to explore these issues with you (and with others, such as those attending the conference you will be moderating) in more depth and I will remain open to doing so at any time you believe that will be helpful. If you have particular questions about any of this, please just ask. As I noted in an earlier e-mail, John and I have done a tremendous amount of work in this area. The odds are that any questions that are concerning you today relate to points that we have examined at some earlier time.
Thanks again for all your help with this and for checking in with me again. W’e’re still working on the new calculator; I will certainly drop you a note when it is available in the event that I do not hear from you again prior to that time.