The Value Walk site has posted my article entitled The Retirement Risk Evaluator: Part Two — The Effect of Valuations on the Safe Withdrawal Rate.
Juicy Excerpt: At this valuation level, the safe withdrawal rate drops with increases in the stock allocation, moving from a high of 3.9 at a 20 percent stock allocation to a low of 3.1 at an 80 percent stock allocation. While this result is in accord with the conventional idea that adding stocks to a portfolio increases the risk associated with the portfolio, it does not offer support for the conventional explanation of why this is so. The conventional idea is that stocks are more risky because they provide higher returns (the theory is that investors are being compensated for being willing to take on added risk). The data shows the safe withdrawal rate dropping as the stock allocation goes higher (in cases in which the valuation level is high) because returns being generated are poor! Investors are not rewarded for taking on the added risk that comes with investing heavily in stocks at times of high valuations, according to the Risk Evaluator. They are penalized! We need to begin examining the concept of an Equity Risk Penalty.