A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

“A Lot of Planners are Starting to Question
Their Passive Investing Beliefs”

by

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 Michael sent to me on November 10.

Rob,

I will be having dinner with Bill [the reference is to Bill Bengen, an Old School SWR researcher] tonight, in advance of the panel session tomorrow. Although I don’t know how much we’ll be getting into this topic during the panel session itself, I’m sure it will be a part of the dinner conversation. It should be interesting.

As a sidenote, I find that a lot of planners are starting to question their passive investing beliefs and re-evaluate them in light of the recent market events. However, I don’t know to what extent Bengen is reacting TO the markets, versus actually espousing the beliefs that you have. I don’t think he went to cash in response to the market declines. I think he actually had a lot of his clients out IN ADVANCE of most of the declines (of course, I’ll get more clarification tonight). It’s one thing to be selling to cash after the severe drops happen. It’s another to account for valuation (as well as other economic signals) to get defensive with your clients AHEAD of time. Although we didn’t take such an “extreme” position, we’ve had our clients significantly under-allocated to equities all year based on these risks, well ahead of the crash (of course, inevitably after the fact we all still wish we’d gone even further than we did). I wouldn’t call us market timers though. To me it’s simply prudent risk management.

But overall, I don’t make such a distinction about “being tactical” and “a bad market timer”. It’s a very slippery slope. If I take my 60% equity client to 40% it’s being tactical and defensive, but going to 0% is a market timer. Where’s the line? What if I took them down to 30% equities? 20% equities? 10% equities? Where’s the line? In short, I don’t think the relative change is the deciding factor in the first place. It’s the inputs you use to make the decision. If you’re doing technical analysis and moving in and out continuously, it’s market timing. If you’re using the principles of valuation and economic analysis to evaluate high and low risk periods, it’s tactical and it’s risk management, (almost?) regardless of how extreme of a shift you ultimately make.

Respectfully,

– Michael

Comments

  1. If you’re doing technical analysis and moving in and out continuously, it’s market timing. If you’re using the principles of valuation and economic analysis to evaluate high and low risk periods, it’s tactical and it’s risk management, (almost?) regardless of how extreme of a shift you ultimately make.

    This is healthy. Too often in the past, I have seen people brand all allocation shifts as being the evil market timing. Benjamin Graham and others had definitions much closer to this. The evil market timing is making hyperactive changes in the short term.

    Have fun.

    John Walter Russell

  2. Too often in the past, I have seen people brand all allocation shifts as being the evil market timing.

    That’s the curse of the Passive Investing Mindset.

    Once you buy into the idea that valuations don’t matter, ALL investing realities come to be perceived as a threat to your root “strategy.” If you get the fundamentals wrong, the entire building stands on shaky ground.

    Rob

  3. So, let me get this straight. When you guys do it it is tactical risk management. When anyone else does it, it is market timing.

  4. When you guys do it it is tactical risk management. When anyone else does it, it is market timing.

    I favor long-term market timing, Steve.

    I don’t favor being apologetic about it. My take is — Say It Loud, I’m a Market Timer and I’m Proud!

    I think that Michael may be reluctant to call what he does “market timing” because he still has not entirely rid himself of the Passive Investing Mindset. We’ve been taught by advocates of the dominant model that timing is bad or stupid or not likely to work. When we put the Passive Investing model behind us, we will no longer be talking about whether timing is good or not or necessary or not. We will be talking about what we should have been talking about all along — what sorts of market timing work and what sorts of market timing do not work, what sorts of market timing are required for successful long-term investing and what sorts of market timing should be avoided by those investing for the long term.

    Rob