FrugalDad’s blog entry for yesterday (“Saving for Retirement: What’s Your Number?”) explored the infamous “4 percent rule” from the Old School safe-withdrawal-rate studies.
Juicy Excerpt: The rule of 4% uses a couple assumptions, some of which are hard to justify in our current market conditions.
I put forward some comments explaining why I believe that the Old School studies are analytically invalid and why the New School studies are the future of retirement research. I pointed out that The Retirement Risk Evaluator shows that the safe withdrawal rate for retirements beginning at today’s valuations is over 6 percent.
Juicy Excerpt: Suggesting that the number is low today just adds to the doom and gloom, which is the last thing we should be doing today. The reason why we are inclined to overstate the bad news today is that we are reacting to the shock experienced in seeing stocks perform from insane price levels just as we would have expected them to had only the “experts” warned us of the dangers. Emotional extremes beget emotional extremes.
John Walter Russell says
It is interesting. When prices were high, people thought that 4% was too conservative. Now that prices are much, much lower, many people think that 4% is too high.
Have fun.
John Walter Russell
Rob says
And they are 100 percent sincere.
The way out is to note other areas of life where we see similar phenomena. Doing that gives you a sense of what it is you are up against.
Advertising is the one that occurs to me. If you asked people in a poll whether they are affected by television commercials, most would say no, they ignore them. But there must be some reason why companies continue spending millions on them. The reason is — Advertising works! it doesn’t matter that people think they ignore commercials. Commercials are always doing the job they were intended to do without the people being affected taking note of this.
Passive Investing is marketing. It is slogans that appeal to the emotions that are repeated over and over and over again. People believe that timing never works. It is a preposterous idea. It makes precisely zero sense. But people believe with their hearts, minds and souls.
If we want to avoid future price crashes and future economic crises, we need to use the tools that are today used to sell Passive Investing to sell Rational Investing instead. What if people heard the message “Timing Is Required” 10 times a day for 30 years? They would come to believe it. Bull markets would be a thing of the past and so would bear markets. Stocks would just offer that boring old 6.5 percent real return most years.
The tools are all available to us as a society today. We need leaders to step forward and spend some money helping people to learn how investing works in the real world. We could bring the economic crisis to an end by explaining to people why they lost so much of their retirement money and what they need to do to make sure it never happens again. Sensible explanations would restore confidence in the markets.
But it will take effort. And it will take money. And it will take a willingness on the part of some Big Shots to say those magic words “I” and “Was” and “Wrong.” The economic crisis is a test of our national will. We can destroy ourselves or we can bring in the golden age of middle-class investing. Our call.
The only rational thing to do is —
Pray!
Rob