Set forth below are some words that Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan (Wade is the fellow who recently posted preliminary research showing that Valuation-Informed Indexing beats Buy-and-Hold is 102 of the 110 rolling 30-year time-periods in the historical record), posted as a comment to yesterday’s blog entry. My responses will appear in the comments section.
Dear Rob,
We haven’t talked for a while, and I thought I’d drop by to say hi.
I’m still working on the valuations-based investing topic, but it has been going a bit slower. I have noticed you’ve been writing many interesting articles about my blog post, and I appreciate all your comments. It is hard to keep track of all your articles, but I do especially like the one with six criticisms of my research.
Admittedly, I lost some enthusiasm about the topic when I found out I was only rehashing the stock formula investing plans of the 1940s and 1950s. But I think it is still an interesting topic. I’m slowing the pace down as well, because I am trying to more formally explore the risk side as well by looking at things such as Sharpe ratios. I had the goal of finishing the paper by the end of February, and I think that is still a reasonable goal, but not guaranteed.
One thing that slowed me down is on February 4th I started looking at the issue of using overlapping historical data to combine the working and retirement phases of retirement planning into a complete whole. I was quickly amazed by the results, and I’ve spent the last 8 days writing a paper about this. This paper doesn’t rely on valuations, at least in an explicit sense, because I am trying to make it as uncontroversial as possible. But it is still going to be controversial, as it suggests that the traditional approach to retirement planning (as described on pages 10 and 11 of the Bogleheads’ Guide to Retirement Planning, for example) is counterproductive and possibly damaging. I think you might enjoy reading this paper. It may provide you a fresh angle on your own work, as I am also suggesting that the idea of “safe withdrawal rates” is not particularly useful as well. This may be some counter-intuitive stuff. I’ve got a blog post about it:
http://wpfau.blogspot.com/2011/02/safe-savings-rates-new-approach-to.html
The paper is complete, and in the actual paper I go into more detail about the situation for recent retirees, which I don’t mention much in the blog post. I will email you the paper, because it will be a few days before the place I submitted the working paper to will make it available for public viewing. They have editors check the papers first.
I think I will talk the weekend off (Lost Season 6 with Japanese subtitles – so my wife can properly enjoy as well – has finally been released). But next week I will be working on the valuations stuff again.
Best wishes, Wade
We haven’t talked for a while, and I thought I’d drop by to say hi.
It’s always nice to hear from you, Wade. Thanks for doing so.
Rob
It is hard to keep track of all your articles
Judging from the content of the remainder of your comment, you haven’t exactly been slouching off either, my friend!
Rob
I do especially like the one with six criticisms of my research.
That was my favorite too.
I know that you are not being defensive when you use the word “criticism.” But for the benefit of any others who might be listening in, I want to emphasize that in no way was it my intent to suggest deficiencies in the research (unless it can be said that a piece of research that does not address every question that ultimately needs to be addressed is “deficient” as a consequence). Your research was obviously a huge advance.
What prompted me to write the article were the niggling criticisms put forward at the Bogleheads Forum thread. I of course don’t object to the content of the criticisms. We need lots of people from all perspectives challenging your findings and offering different suggestions as to their implications and all this sort of thing.
But that is something that needs to be part of a far-reaching national debate on the realities of stock investing. The first step toward making our efforts constructive ones is getting that national debate launched. To FOCUS on the petty fault-finding is to attempt to hold off the launching of that debate, which is a horrible, horrible, horrible choice. I was repulsed by the tone and spirit of most of the comments put to the Bogleheads thread (while finding considerable value in the content of a good number of them).
The aim of my article was to show that, while there are reasonable arguments for thinking that your research on Valuation-Informed Indexing is not quite as big a deal as it first appears to be, there are also numerous reasonable arguments for thinking that it is a far BIGGER deal than it first appears to be.
There is no one person who can say what the ultimate reality will turn out to be. We are all too limited by our personal biases. I wanted to balance the pettiness of the take evidenced at the Bogleheads Forum (I certainly do not believe what we saw was anything even close to the take that we would have seen evidenced there had all community members felt that it was safe for them to state their sincere views — we know from past experience that the most intelligent and informed and ethical community members feel a need to silence themselves in all discussions of important investment-related topics that take place there) with some words pointing in the opposite direction.
I believe that your research on VII is far more important than even you understand it to be, Wade. But then I would, wouldn’t I?
Rob
I lost some enthusiasm about the topic when I found out I was only rehashing the stock formula investing plans of the 1940s and 1950s.
I am internationally famous for my pep talks, Wade!
It is not even a tiny bit discouraging to learn that this basic concept was given serious exploration at an earlier time. Did you view it as a bad thing to learn that Benjamin Graham endorsed the Valuation-Informed Indexing concept in the 1930s? I sure didn’t. That told me that I was on the right track, that I wasn’t a total (but only a partial) crazy man. If it turned out that I was the first person who had ever thought that perhaps valuations matter, I would have to start wondering if perhaps the Goons are right that the problem all along has been that I have not been careful enough about taking my meds at the prescribed times.
There are no entirely new ideas, Wade. Ideas come and go and are reformulated to better fit new times. There has been a battle between Get Rich Quick (valuation-uninformed) and Rational (valuation-informed) investing styles going on since the beginning of time.
It doesn’t follow that we cannot add anything new to the Rational approach this time around. The Get Rich Quick approach achieved greater dominance in recent decades than it has ever achieved in the past — this is evidenced by the fact that we went to the highest P/E10 level ever seen in the historical record. Why? What happened in recent decades that made Get Rich Quick more appealing than it has ever been in the past?
The biggest thing is that investing analysis went scientific. We didn’t have academics like you studying these questions in earlier times. Having academic studies supporting Get Rich Quick investing strategies gave them a legitimacy in the minds of millions that they otherwise would never have come to possess.
What if we flip that? What if we use the power of academic research to OPPOSE Buy-and-Hold rather than to prop it up?
Then it is the rational strategies (Valuation-Informed Indexing) that will benefit from the turn to making use of science in investing analysis. I believe that, if we survive the damage done when Get Rich Quick achieved greater popularity than it has ever seen before, we are headed into the greatest period of economic growth ever seen in our history.
Fama and Malkiel and Bogle were onto something very important when they proposed using the historical return data to guide investing choices. The next step is to insist that the research done in this field be ACCURATE. The analytically invalid research of the Buy-and-Hold Era has done us all terrible harm. But what if we begin today using the power of academic investing research not to destroy middle-class dreams of financial freedom but to assist them? There’s no telling how far we can advance once we turn around and start walking in the direction in which we all (including Fama and Malkiel and Bogle, to be sure) very much want to go.
The people who came up with the stock formula plans were pioneers. We are building on their work. They would very much want us to take this in a positive direction and to achieve the things that it was not possible for them to achieve in their day. I’m sure!
Courage, Wade!
And Love!
Courage and Love are what get this job done. We don’t need to worry about Brains too much, in my assessment. My experience is that just about everyone who does work in this field has Brains coming out of his or her ears, but that deficiencies in the Courage and Love departments can be seen just about everywhere one looks.
Rob
I am trying to more formally explore the risk side as well by looking at things such as Sharpe ratios.
I think that the idea of putting more energies into exploration of the risk side of the equation is a very good one.
I don’t know enough about how Sharpe ratios work to be able to say whether the Sharpe ratio is likely to be a helpful tool here or not.
Rob
I started looking at the issue of using overlapping historical data to combine the working and retirement phases of retirement planning into a complete whole. I was quickly amazed by the results
I agree that this new research is also of awesome significance, Wade.
You are on a roll, my friend. Enjoy that feeling! My experience is that, when one of these on-a-roll periods comes, the feeling is good enough to make years of dull forward plodding worth it!
Rob
This paper doesn’t rely on valuations, at least in an explicit sense
My initial reaction is that what you are saying here is correct in precisely the way you say it.
You’re not factoring in valuations because you are having the investor stay at the same 60/40 allocation through the entire 60-year time-period. But you are not denying the effect of valuations (as the Buy-and-Holders do) because you are using a 60-year time-period.
Take a look at the 60-year results generated by The Stock-Return Predictor and you will see that starting-point valuations have close to zero effect on 60-year returns.
Valuations have little effect in the first five years (because it is investor emotion that has the dominant effect on returns in the short term,), a significant and growing effect at 10 years, 15 years and 20 years (because enough time has passed for the economic realities to become the dominant effect on returns), and then a diminishing effect until the valuations effect is for practical purposes non-existent from Year 30 forward.
When you get to 30 years, your return reflects the effect of both one secular bull market (bringing long-term returns from that point forward dramatically down from 6.5 percent real) and one secular bear market (bringing long-term returns from that point forward dramatically up from 6.5 percent real). The net effect is something close to a wash.
Rob
I am trying to make it as uncontroversial as possible. But it is still going to be controversial
You may not believe it to hear me today, Wade, but there were several years there back a ways when I tried to say things in non-controversial ways. I found that it never helps even a tiny bit (unless you are willing to take the idea so far as to not say anything meaningful or constructive).
Buy-and-Holders are smart. They recognize a threat to their strategy a mile away. Any advance in our understanding of how stock investing works represents a threat to Buy-and-Hold in the eyes of those who worship at its altar.
Your efforts to remain above the fray are doomed, my good friend. (A joke!)
Rob
it suggests that the traditional approach to retirement planning (as described on pages 10 and 11 of the Bogleheads’ Guide to Retirement Planning, for example) is counterproductive and possibly damaging.
Now you’ve done it!
I don’t know you, man! If anyone asks, you’re just some crazy dude who sometimes posts comments to my blog. I’d ban you if I didn’t follow a no-ban policy.
Rob
It may provide you a fresh angle on your own work, as I am also suggesting that the idea of “safe withdrawal rates” is not particularly useful as well.
I definitely agree that it offers a fresh and powerful angle.
I don’t think I agree that it renders SWR analysis not useful.
The approach you are describing would work. The investor is essentially not counting the temporary gains of bull years as real. So he is not getting himself into the trouble that Buy-and-Holders get themselves into.
But you are leaving out the need for the investor to change his stock allocation in response to big valuation shifts. I think it is fine to do this to illustrate the point you are making (which is of great significance, in my view). But I would of course never suggest to any investor that he be open to the idea of staying at the same stock allocation at all times. A New School SWR analysis brings out why that is important.
I see the two types of analysis (the analysis done in your paper and New School SWR analysis) as making different important points and as complementing each other rather than contradicting each other.
I see it as two different ways of looking at the retirement planning problem, with each of the two ways highlighting different important aspects of the overall project.
Rob
This may be some counter-intuitive stuff.
It will be counter-intuitive to Buy-and-Holders. It is sort of a non-Get Rich Quick approach to Buy-and-Hold because the investor is not counting the phony gains of bull years as real.
I don’t personally find it counter-intuitive. It fits what I like to think I have learned about the realities over the past nine years. I think what you have done makes perfect sense.
Rob
next week I will be working on the valuations stuff again.
It’s a wonderful life!
Rob
Hi Rob,
Thanks for the pep talk.
How do you make italics?
“The people who came up with the stock formula plans were pioneers. We are building on their work. They would very much want us to take this in a positive direction and to achieve the things that it was not possible for them to achieve in their day. I’m sure!”
This is true. I didn’t say that my enthusiasm was gone, just diminished. Actually, reviving the formula plans is a worthwhile goal in itself. They lost their popularity after a big market boom in the late 1950s (kind of like the late 1990s) leaving the formula planners behind, and then they seemingly faded away.
“You’re not factoring in valuations because you are having the investor stay at the same 60/40 allocation through the entire 60-year time-period. But you are not denying the effect of valuations (as the Buy-and-Holders do) because you are using a 60-year time-period.”
What you are saying here is interesting, and close (but also different) to what I had in mind. What I was hinting at is that traditional retirement planning assumes there is no link between what happens in the 30 years before retirement and the 30 years after retirement. In this regard, my Figure 4 strongly suggests that there is a link. I suppose valuations can be used to motivate why this link exists, but I was refraining from lighting that powder keg. Figure 2 also tells a similar story, and one I never saw mentioned before. There is a very close relationship that high portfolio returns cause the maximum sustainable withdrawal rate to be lower in the next year, and vice versa.
About the fixed asset allocation, anyway I once read what I thought was a great idea that research papers should be designed as “minimum publishable units.” One paper can’t contain everything. I think there is already so much going on in this paper that just keeping a fixed asset allocation helps to simplify some aspects. That is also why I didn’t use target date fund style allocations yet either, though that would probably me more realistic. But later, a whole other paper could be re-doing this with valuations-based tactical asset allocation. Actually, I think this was one of your 6 criticisms of my earlier blog post, and a valid criticism at that.
But more generally, this paper isn’t saying anything bad about buy-and-hold. That would have to come in the later paper that compares it with valuation-based investing. I’m targeting completely different aspects of traditional retirement planning in this paper.
“The approach you are describing would work. The investor is essentially not counting the temporary gains of bull years as real. So he is not getting himself into the trouble that Buy-and-Holders get themselves into.”
Yes, I agree 100% with this and you expressed it very well. Well for now, in your quote, I would replace “Buy-and-Holders” with “those following traditional retirement planning advice” and you nailed it 100%.
“I see it as two different ways of looking at the retirement planning problem, with each of the two ways highlighting different important aspects of the overall project.”
I agree with this too. There is a section of the paper on page 12 called “Potential Tragic Consequences of the Traditional Retirement Planning Approach” which I hinted at only briefly in the blog post, but this is where a lot of the complementarities show up.
Please take care, Wade
How do you make italics?
Put this code before the material you want to show in italic: (1) the less-than sign; (2) the small letter “i”; and (3) the greater-than sign
Put this code after the material you want to show in italic: (1) the less-than sign; (2) the slash mark (/); (3) the small letter “i”; and (4) the greater-than sign
Rob
15 comments, and all but one from Wade are from the Bloviator in
Chief, talking to himself!
LOL
Here I’ll help you get some content by making at least one legitimate comment, Rob (probably means you’ll delete it…)
Rob said: “I don’t know enough about how Sharpe ratios work to be able to say whether the Sharpe ratio is likely to be a helpful tool here or not.”
Gee, Rob — that minor point sure has not kept you from making fun of anyone referencing Sharpe Ratios (including me) in the past, in post after post… probably a dozen times at least off the top of my head.
Rob, despite your personal world-view, ignorance is NOT bliss, and while IMHO he is misguided, and ‘rediscovering’ what most finance professionals consider to have been some pretty basic fundamentals, at least Wade is continuing to investigate, instead of letting his brain ossify.
Get help Rob. Before close of business today! I can see no downside!
One paper can’t contain everything. I think there is already so much going on in this paper that just keeping a fixed asset allocation helps to simplify some aspects.
Yes!
In order to learn about one factor, you need to hold other factors constant. Holding other factors constant clarifies and highlights the effect of the factor being examined.
This is why indexing opened the door to so many huge breakthroughs in our understanding of how stock investing works. With individual stocks, there are 20 different factors affecting the return obtained. With index funds, there are only two: (1) the productivity of the economy; and (2) valuations. Everything else is priced in. So nothing else matters.
Valuation-Informed Indexing assumes that productivity of the U.S. economy will remain roughly what it has always been. Assume that, and you are left with only one factor that matters — Valuations.
This is why we can now use valuations to predict long-term stock returns. What wasn’t possible in the many years in which indexing was not available as an option became possible when indexes holding all other factors constant were created.
This is by far the biggest benefit of indexing, in my assessment. Stock returns are now highly predictable. Which means that stocks are now a low-risk asset class (for those willing to abandon Buy-and-Hold). It doesn’t get any better than finding an asset class that provides high returns at low risk!
Rob
this paper isn’t saying anything bad about buy-and-hold.
We disagree on this one, Wade. It’s implicitly pointing out that the promotion of Buy-and-Hold has caused millions of failed retirements.
Why do you think the Old School SWR studies don’t include an adjustment for the valuation level that applies on the day the retirement begins?
It’s because the Buy-and-Hold Model posits that such an adjustment is not needed. Take a look at how “A Random Walk Down Wall Street” explains changes in stock prices. Malkiel says that they are caused by unforeseeable economic developments (foreseeable ones would have been priced in at the moment they became foreseeable). The model is rooted in the Efficient Market Theory and thus treats stock price changes as the result of rational actions on the part of investors.
The Shiller Model (Valuation-Informed Indexing) says that short-term prices are set by an irrational phenomena, shifts in investor emotion, and that long-term prices are set by the economic realities (which always pull prices in the direction of fair value). This is why returns are highly predictable in the long term. Knowing the difference between the current price and the fair-value price tells you how much movement in price and in what direction you are going to see over the next 10 years or so.
Buy-and-Holders are using an AVERAGE of all the possible returns as the return that applies at all times. They are treating the current price as REAL. That’s why Buy-and-Hold is so dangerous. Treat a bull market price as real and you are going to get killed.
You are advising investors not to treat the current price as real. Stocks were priced at three times fair value in 2000. Someone who needs $1 million to retire and thought he had it in 2000 went ahead and handed in a resignation even though he possessed only $350,000 in lasting wealth. That’s as dangerous as all get-out.
You’re not advising that. You’re telling the investor who has $1 million in temporary wealth and $350,000 in lasting wealth to act as if he had $350,00 in lasting wealth. The Buy-and-Holders are telling him to act as if he had $1 million in lasting wealth. You’re doing the opposite of the Buy-and-Holders even though you are not explicitly pointing out that the reason why they got it so wrong is that they failed to take valuations into consideration.
The appeal of Buy-and-Hold is that it permits investors to entertain the fantasy that their temporary wealth is real wealth. You are not encouraging this fantasy. My guess is that the Buy-and-Holders are going to notice this and that you are going to find yourself in the middle of a “controversy” no matter how much you try to avoid becoming entangled in one.
To the extent that you get things right, you are always going to be controversial to Buy-and-Holders. Buy-and-Hold is rooted in emotion, not reason. The entire idea is to get things wrong (and to use lots of calculations and big words in an effort to persuade oneself that the wrong thing is the right thing according to some mysterious form of science). If Buy-and-Holders wanted to get things right, they would count valuations. But then they wouldn’t be Buy-and-Holders anymore!
Rob
I’m targeting completely different aspects of traditional retirement planning in this paper.
I understand that you are taking a different focus. I still think that anyone who spends some time thinking about it is going to see an implicit criticism of the retirement advice that was being given during the Buy-and-Hold Era.
I’m not being at all critical. I think this is a good thing.
If not including an explicit criticism lets you get under the radar shield, more power to you!
I don’t think you will get under the radar shield, however. Ghandi said that first they ignore you, then they fight you, then they say that everybody knew what you were saying all along.
If they don’t see your research going anywhere, there will be no fuss (but you will be having no positive impact) If they see your research having a positive effect, they will go into panic mode and there will be a big “controversy.”
But you are right, so you are going to prevail in the end. When you prevail, they will say that they knew all this all along and that they were just joking around with all that Buy-and-Hold business.
They already do this in the SWR area. They now say that the SWR was never meant to be the product of an analytically valid exploration of the historical data, it was just a “rule of thumb.” Some funny joke, huh?
Rob
in your quote, I would replace “Buy-and-Holders” with “those following traditional retirement planning advice” and you nailed it 100%.
Okay.
I gave up trying to be non-controversial a few years back. I found that it made things too confusing to my readers for me to go through all these back flips and such. Now I aim for clarity. I view the model developed by Fama and Malkiel and Bogle the cause of all the trouble, regardless of what anyone chooses to call it.
What you are calling “traditional retirement planning advice” I am calling “Buy-and-Hold Model retirement planning advice.” We’re saying the same thing using different words.
Rob
There is a section of the paper on page 12 called “Potential Tragic Consequences of the Traditional Retirement Planning Approach”
I haven’t read the paper yet, only the blog post summarizing it. I will be sure to read the actual paper, especially this section.
It is the millions of failed retirements that has been my driving concern going back to the morning of May 13, 2002. I find the idea of participating in a project that is going to cause millions of failed retirements a big-time turn-off.
Rob
that minor point sure has not kept you from making fun of anyone referencing Sharpe Ratios (including me) in the past
You’re only telling half of the story, Drip Guy.
I don’t make fun of people just for knowing about the Sharpe ratio and how to put it to use and all this sort of thing. I admire those people. I respect those people. I wish that I possessed the skills possessed by those people (including you!).
What I make fun of is the idea of using your knowledge of the Sharpe ratio as a shield from facing the realities as to the great human misery you have caused with your tireless promotion of Get Rich Quick investing strategies (all backed by most of those with impressive knowledge of Alpha and Beta and the Sharpe ratio, to be sure).
The bottom line here is that the thing that I care about in all this is the millions of people who are going to suffer failed retirements because of the reckless investing advice. If someone can use the Sharpe ratio to get the reckless investing advice corrected, I will be first in line to applaud the Sharpe ratio. If it never helps any human beings, you can drop it in the middle of the Atlantic ocean and it’s all the same to me.
You use the Sharpe ratio not to help you reason but to help you rationalize, Drip Guy. It’s not the Sharpe ratio itself that is bad. But I think it’s fair to say that anything that encourages you to engage in more rationalizations in the investing area is not serving a positive, life-affirming purpose to the extent it does that. So it would certainly be fair to say that I have seen the Sharpe ratio put to bad use on more than one occasion.
I am the biggest believer in the idea of rooting investment advice in science alive on Planet Earth today. The big difference between me and the Buy-and-Holders is that I believe that, once we began employing science to understand investing, we took on an obligation to report what the science says accurately and honestly.
Until we get to a point where we all see the need to let the millions of middle-class investors who are likely to suffer failed retirements that it was our collective unwillingness to say the words “I” and “Was” and “Wrong” that placed them in such circumstances, the idea that we have learned something important from our use of the Sharpe Ratio is a big, cruel joke, in my assessment.
If you don’t know why we should be trying to prevent failed retirements, your understanding of the Sharpe ratio counts for zip in the real world. If you don’t understand why we need to report SWRs accurately and honestly, you know precisely nothing of value about the subject of stock investing, even if your name is John Bogle or Burton Malkiel or Eugene Fama.
That is my sincere take re this important matter, in any event, Drip Guy. I laugh about the Sharpe Ratio to keep from crying about what has happened to many of my fellow community members as a result of people who have made the Sharpe Ratio their god and thereby have lost sight of the consequences of their behavior on millions of human lives.
In my mind, the Sharpe Ratio has value only to the extent it helps humans. It’s the human lives that really matter. The Sharpe Ratio (and all the other Buy-and-Hold gimmickry) is of secondary importance to me. It’s just not my particular cup of tea.
Rob
ignorance is NOT bliss
Neither is a callous indifference to widespread human misery, my old friend.
I don’t advocate ignorance. But I would far prefer that they write on my tombstone that I was a dumb bunny than that I evidenced a callous indifference to widespread human misery.
It’s just one more reason why I have become the most “controversial” figure on the internet today. Imagine caring about people who suffer failed retirements — whatever will they come up with next?! A true “threat to the community,” in the words of our good friend Alex Fract.
I bet good old Alex knows all about the Sharpe Ratio, eh?
Bully for him, you know?
Not this boy. This boy cares about his friends. This boy doesn’t belong in any board community where that is not permitted.
Non-negotiable.
Deal with it.
Rob
Get help Rob. Before close of business today! I can see no downside!
You are filled with anger, Drip Guy. You are not going to be able to make any sense out of stock investing until you deal with this matter.
I cannot solve this problem for you. It is an inside job.
You are not the only angry Buy-and-Holder I have come across. One of the reasons why I am less than keen about this investing “strategy” is that I have seen what it does to so many people’s souls. You were not put on Planet Earth to continually degrade yourself with the experience of feelings of such hatred.
There was a time when you cared about getting it right and also about retaining your own self-respect. You need to try to get in touch with that old Drip Guy. The new one is on a bad path.
You were meant for better things, in my sincere assessment.
Rob
Hello, and now I can start using italics 🙂
and while IMHO he is misguided, and ‘rediscovering’ what most finance professionals consider to have been some pretty basic fundamentals
DRiP Guy is right about this point. In my efforts to tune out all the chitter-chatter noise from finance talking heads, I didn’t realize how common the valuations stuff already was. Here is just the most recent thing I’ve seen:
http://www.pionline.com/article/20110110/PRINTSUB/301109980
DRiP Guy, I appreciate your other comments, and while I figured your were going to be critical, I must say I am relieved that I don’t think you’ve poked any serious holes. Of course you can poke fun about how everything I say is obvious, but please show me where someone said this before. Well, I know that a Bogleheads tenet is that you should save early and often. That part is not mind-blowing. But there is some other stuff in the paper too.
I’m not saying that the MWR can be predicted in this paper, but just that if you save with the SAFEMIN savings rate, you will have always saved enough so that your are able to enjoy your desired retirement expenditures by using an actual withdrawal rate that ends up falling below the MWR (which you won’t know until 30 years later).
In this regard, my paper is just the ‘Trinity study’ done over the lifetime rather than just for the retirement period.
About my baseline individual, it is just a baseline individual. There is not a universal safe savings rate, but I am explaining how to go about calculating a personalized savings rate using a baseline individual for an example.
Finally, I think I can interpret what you are saying is that there is no useful information provided in my Figure 4. Though I will try to keep an open mind about your point, I don’t yet agree with it. That being said, I think I understand what the Trinity study says, and I don’t think you refuted anything about what I said, beyond saying that you don’t trust the pattern shown in Figure 4.
By the way, I recently learned that (I think) you are the primary author of the Bogleheads Wiki entry on safe withdrawal rates. That’s cool. I didn’t know you had a more academic interest in this topic beyond your own personal retirement planning and also your debates with Mr. Bennett.
What you are calling “traditional retirement planning advice” I am calling “Buy-and-Hold Model retirement planning advice.” We’re saying the same thing using different words.
Okay, Rob, I have to give you some credit here. You are being pretty persuasive with this stuff! I don’t have any particular disagreements with what you are writing here.
Best wishes.
In my efforts to tune out all the chitter-chatter noise from finance talking heads, I didn’t realize how common the valuations stuff already was.
I’ve had two major criticisms directed at me over the course of the past nine years, Wade. One is that nothing I say is even a tiny bit original, every word of it was known by everyone in the field going back to the first day. The other is that the stuff i put forward is so shockingly at odds with the conventional wisdom that I obviously need to be fit for a straightjacket.
It’s a little hard to see how both of these criticisms could be valid, no?
Everyone signs on to the statement “Valuations matter.” Drip Guy signs on to that. The “controversy” begins when you stop treating the phrase “valuations matter” as a nice thing to say and start trying to offer practical investing guidance that follows from recognition of this reality.
If you don’t change your stock allocation in response to valuations, they don’t matter for you. Making a change in his allocation is the only practical step an investor can take to reflect his belief that valuations matter.
I say that valuations matter not only theoretically but also in the real, practical world. I am non-dogmatic as to the particulars. I have my own views but I think it is too early in the game for any one set of views to be put forward as proven true. We need to hear lots of people offering lots of different thoughts and together try to figure it out by doing that.
There’s only one point that I am dogmatic about. I am dogmatic in saying that we must be willing to listen to a variety of perspectives. When I say that I want honest posting, I don’t mean just for me. I want you always to share your sincere views. I want Drip Guy always to share his sincere views. Until we get away from this idea of people treating their investing beliefs as articles of religious faith that may not be questioned, people just don’t feel safe saying what they truly believe. That makes it very hard to move forward.
There are a lot of people who accept that valuations matter. But no one has put all the pieces together. The field is rich with opportunities to produce helpful research. Even research that gets something wrong can be helpful because it can prompt people to look at things in a new way and thereby generate further research that will hit closer to the mark.
Almost everyone in this field knows less than he or she thinks he or she does. People think I am making a dig when I say that. That’s not my intent. My intent is to point to the huge opportunities before us. If we can stop worrying for a few moments about people coming to see that we didn’t always know it all and about who gets the credit and all this nonsense gibberish, we can change the world in some very positive ways.
I haven’t figured it all out. But I think I have gained a sense of the possibilities. It’s beyond your imagination how far we could go with this. Again, no dig — my intent is to be encouraging. Once we break this tackle, we are going to run and run and run.
And we will be thanking the Buy-and-Holders for the important work they did setting things up in such a way as to make these huge advances possible. I say things like that all the time. Few pay attention because it doesn’t fit this mind-numbingly stupid narrative of “Rob the Meanie.” I say it because I believe it is so. There is nothing a tiny bit mean about helping smart and good people come to terms with a mistake that has been holding them back for 30 years.
The work you are doing is of major importance. I hope you don’t let critics soften your confidence. Arrogance is bad. But we need a certain measure of confidence to take on the world and there are millions of people who are going to benefit from your efforts to take on the world if you stick with it long enough for it to bear good fruit.
Rob
Okay, Rob, I have to give you some credit here. You are being pretty persuasive with this stuff!
Hey! That’s not permitted! There was a law passed! I thought everyone knew that!
I’m joking around. I am grateful for those cheering and encouraging words, Wade. It would be nice to think that I had picked up one or two genuine insights after nine years of having live ammunition fired at me non-stop and at close range. It would be more than a little sad to have to conclude that the only prize that I walk away from the experience with is the fun of having endured it all.
Rob
I recently learned that (I think) you are the primary author of the Bogleheads Wiki entry on safe withdrawal rates.
I wrote a blog entry commenting on that particular Wiki entry. You’ll be surprised and astounded and shocked to learn that I am not in 100 percent agreement with Drip Guy as to every last jot and tittle he incorporated into it.
http://arichlife.passionsaving.com/2008/06/10/the-boglehead-wiki-statement-on-safe-withdrawal-rates/
Rob
Hi, I was reading DRiP Guy’s comments about the Trinity study again, and I realized that I forgot to include a caveat in the blog entry. I discuss this in two places in the paper. I wish I could have a link to the full paper. It seems that the folks didn’t get to it on Friday, so it probably has to wait until early next week. DRiP Guy, I do appreciate your comments, and will especially appreciate them after you have read the whole paper, should you wish to do so. Also, I was trying to be sincere that I was impressed when I learned you wrote the Boglehead’s wiki entry, because it shows that you have read many of the past studies and not only the Trinity study. I can understand why Rob doesn’t like the wiki entry though.
Actually, I do not cite the Trinity study in my final paper, mostly because I ran out of room. It was cited in an earlier draft. There is a 5000 word limit at the journal I submitted it to. But personally, I feel that the Trinity study is a minor extension of Bengen (1994) and we should be talking about Bengen instead. For some reason, Trinity switches to corporate bonds instead of using intermediate-term bonds, but then they could say that the 4%, 30-year, 50/50 asset allocation has a 95% success rate, whereas with intermediate-term bonds it would still be a 100% success rate. 95% sounds more scientific, I guess, as it reminds us of 95% confidence intervals from our statistics class. It might sounds less impressive to say what is actually the case: 4% worked in 39 out of 41 rolling historical periods. What’s more, it failed in 1965 and 1966, which were the two most recent years that the Trinity authors could investigate.
If you wanted to do the Trinity study treatment of my paper, it would just be something like saying that a 17% savings rate works 100% of the time, 16% works 95% of the time, etc. But I honestly don’t see why that is so particularly useful.
That being said, I still stand by the idea that my paper is just Bengen/Trinity applied to the lifetime rather than just the retirement period.
Anyway, I have added the following to the end of the blog post to help clarify a few things:
Update: This blog post is meant only as an extended summary of the paper contents. It doesn’t include all the details, just the highlights. But I’ve noticed that I missed mentioning two rather important details. They are:
1. Of course a caveat must be included that the “safe savings rate” is merely what has been shown to work in rolling periods from the historical data. The same caveat applies to the “safe withdrawal rate” as well, as in the future we might experience a situation in which the safe savings rate must be revised upward or the safe withdrawal rate downward. “Future” here actually means post-1980, because I cannot calculate 30-year MWRs for people who retired since 1980.
2. It must also be clear that the findings about safe savings rates in this study are not one-size-fits-all. The study merely illustrates the principles at work by focusing on the case of a particular stylized individual. Real individuals will vary in their income and savings patterns, consumption smoothing needs, desired retirement expenditures, and asset allocation choices. Individuals will still need to determine their own “safe savings rate” in consideration of these factors, and the paper provides a framework to accomplish this task.
Maybe I went too far to say that the Trinity study is only a “minor extension” of Bengen (1994). The tables of probabilities they produced are useful for people, subject to Rob’s caveats of course. Bengen didn’t think to frame his results in that way, so there is not so much in the way of practical advice that people can get from Bengen, other than 4%, 4%, 4%. The Trinity study is quite important in that regard, and I was too harsh. Trinity deserves it place in the rollcall of important retirement planning studies. That being said, the really groundbreaking, pioneering stuff is from Bengen (1994).
I was trying to be sincere that I was impressed when I learned you wrote the Boglehead’s wiki entry, because it shows that you have read many of the past studies and not only the Trinity study. I can understand why Rob doesn’t like the wiki entry though.
Now THAT”S a balanced statement!
I’m joking around, Wade. We have to stop to appreciate the lighter side of all this from time to time to avoid losing our collective sanity.
I know nothing about how the Wiki was developed. It seems possible to me, though, that Drip Guy may have been responsible only for the section of the Wiki dealing with the “Controversy.”
It seems possible to me that some people were putting together the Wiki and felt that the “Controversy” has become so big a deal in that particular community (it was the cause of the founding of the new forum) that they needed to address it. It may be that for some strange reason no halfway normal person wanted his or her fingerprints on any words relating to this particular matter and that Drip Guy was viewed as sort of a world expert given his, um, active participation in it for so many centuries.
Years! Did I say “centuries”? I meant “years”! It hasn’t even been one full century yet.
Anyway, I think it’s a safe bet that the “Controversy” section authored by our friend Drip Guy was the most frequently read section of that particular Wiki. He’ll have that one in his Book of Credits come Judgment Day. I would be willing to put up five dollars behind a wager re that one.
Ya done good, Drip Guy!
Rob
It might sounds less impressive to say what is actually the case: 4% worked in 39 out of 41 rolling historical periods.
I figured out a way to make it sound a whole big bunch less impressive than that. I say that the 4 percent withdrawal survived only by a whisker in the two cases in the record in which valuations had gone to insanely dangerous levels. I compare the claim that this shows that 4 percent is safe for retirements beginning at times of insanely dangerous prices to a claim that it is safe to drive drunk because in both of the two cases we tested the drunk drivers were paralyzed for life but managed to hold on to life by a whisker.
I’m bad!
Everybody knows it too!
Rob
The same caveat applies to the “safe withdrawal rate” as well, as in the future we might experience a situation in which the safe savings rate must be revised upward or the safe withdrawal rate downward.
The odds that revisions will be needed go up dramatically when you ignore the most important factor bearing on the question at hand in your “study.”
The historical data shows that the single most important factor affecting SWRs is the valuation level that applies on the day the retirement begins. Leave this factor out of your analysis and you insure yourself that all the numbers generated by your “study” will be wildly off the mark from what would have been generated through the use of an analytically valid methodology. The odds that a revision will be needed obviously go through the roof when such a procedure is employed.
I must confess that there are times when I question whether withdrawal rates identified through the use of a methodology guaranteed to generate numbers wildly different from the numbers that would be generated by an analytically valid methodology should even be referred to as “safe” numbers to use in planning a retirement.
I’m funny that way.
Rob
The tables of probabilities they produced are useful for people, subject to Rob’s caveats of course.
I like that.
A comforting way to think about this nine-year long drama is that it is really just the longest caveat ever recorded in the history of humankind’s journey through the Valley of Tears.
And to think that I had a front-row seat to the entire shebang!
I am humbled.
Rob
Trinity deserves it place in the rollcall of important retirement planning studies. That being said, the really groundbreaking, pioneering stuff is from Bengen (1994).
I of course enthusiastically sign on to that part.
We of course would not be where we are today if not for the efforts of the pioneers who by going first took on the risk of making mistakes that it thereby became possible for those of us coming along later to be wary of and to avoid.
Bengen was breakthrough. Trinity was breakthrough.
Good stuff.
Rob
I thought you didn’t ban people, Rob.
Why was my comment deleted, correcting the record about your false, unfounded, and bizarre surmises regarding my authorship of the Wiki?
The comment was deleted because it was outside the bounds of what is permitted by the social norms of the Indexing and Retire Early discussion-board communities and of the blogs in the Personal Finance Blogosphere, as evidenced by the published rules of all of the sites, in which the site owners promise to protect those of us participating in a constructive and positive and life-affirming way from those putting forward such smelly garbage, Drip Guy.
But I have a funny hunch you knew that all along.
Rob
Hi guys,
Rob, my new blog post on this topic has already received 365 views. They are not all directly from your blog, but I think your blog laid the foundations for this. I don’t think enough people subscribe to my blog for it to be the source, but already there are links from Bogleheads and the Motley Fool, as well as a rather popular Japanese-language finance blog. I thank you very much for that.
Regarding the place for future discussions, it seems inevitable that Bogleheads should be the place. That site gets so much readership. The thread about my article was created by someone named Majormajor78. The link is:
http://www.bogleheads.org/forum/viewtopic.php?t=68683
Unfortunately, I know you can’t participate there, but I will be sure to stop by your blog from time to time, and I will also make a link to your post in the comment section of my blog. Actually, I subscribe to your blog in Google Reader. Later today I would like to write a post responding to many issues at Bogleheads.
DRiP Guy, though we may never meet and I know very little about you, I’d like to think of you as a friend who won’t let me get away with any B.S. I am a Boglehead at heart, so please keep me on the straight-and-narrow when I venture away from the Bogleheads path.
I feel a little silly responding to your board here instead of there, but out of respect to Rob, I probably shouldn’t sign up for an account there.
Your link to the “Slow-Timing the Market” article… I had seen that article title in the “next issue” back during January and was worried that I had been scooped. (Well, I know now that I’ve been scooped hundreds of times anyway). I didn’t read that article yet, but I looked at it long enough to determine that it is about something completely different.
It is already Monday here, and I just received my February issue of the JFP in the mail. There is actually a much more important article in that issue than “Slow Timing” that I just learned about, because it is not listed on their main webpage. It is “Is Buy and Hold Dead? Exploring the Costs of Tactical Reallocation,” by David Blanchett:
http://www.fpanet.org/journal/CurrentIssue/TableofContents/IsBuyandHoldDead/
I haven’t read this one yet to know specifically what he does, but the summary suggests that fixed allocations will beat tactical asset allocations on a risk-adjusted basis. I clearly need to read this one very carefully. David recently emailed me for unrelated reasons, as we have a lot of overlapping research interests, but I had no idea about this article.
I still am not sure why Yipee-Ki-O thought I was being passive aggressive, unless he/she didn’t know that you wrote the Bogleheads wiki. In that case, maybe my comment sounds something like “Oh Mr. Smarty-Pants Know-it-all, I guess you wrote the Bogleheads wiki because your obviously such an expert on the topic.”
Please take care! Wade
P.S. I just found out there is a link to my article. It is just a temporary link I think until the review process finishes, but for now the full article can be obtained at:
http://mpra.ub.uni-muenchen.de/28796/1/MPRA_paper_28796.pdf
already there are links from Bogleheads and the Motley Fool, as well as a rather popular Japanese-language finance blog. I thank you very much for that.
I won’t be satisfied until your blog post is written up on the front page of the New York Times, Wade. That’s the natural goal here. You’ll be getting a whole big bunch of page views when that happens, I bet!
Rob
Regarding the place for future discussions, it seems inevitable that Bogleheads should be the place.
A good number of the people who congregate there have an interest in learning the realities of stock investing. I think that much is certainly fair to say.
However, we know from the posts that were put forward at Motley Fool that there is a huge interest in the stock investing realities at Motley Fool too. And at the Early Retirement Forum. And at IndexUniverse.com. And at the Get Rich Slowly forum. And at Morningstar. And at the Oblivious Investor blog. And at the Free Money Finance blog. And at the Financial Samurai blog. And at the Behavior Gap blog. And at lots and lots of other places.
We’ve learned important things from community members participating in a constructive and positive and life-affirming way at every one of those places. So while I certainly agree that opening the Bogleheads Forum up to honest posting would be a huge plus, I don’t want to leave any suggestion in anyone’s mind that that’s the only place where we want to see honest posting on safe withdrawal rates and on many other important investment-related topics.
My ultimate goal is to open up every investing board and blog on the internet to honest posting.
Why the heck not, you know?
Is anyone able to imagine any possible downside?
I certainly am not. I see it as a win/win/win/win/win.
Rob
Unfortunately, I know you can’t participate there
Just be sure that when they put up one of them there polls seeking a community consensus on whether the Ban on Honest Posting should be lifted, you don’t accidently put your mark in the wrong box by mistake, my new friend!
Rob
I will be sure to stop by your blog from time to time, and I will also make a link to your post in the comment section of my blog.
That’s super. Thanks very much, Wade.
Rob
I feel a little silly responding to your board here instead of there, but out of respect to Rob, I probably shouldn’t sign up for an account there.
I’ll tell you how I handle it, Wade.
I am banned at the Goon Central board at the moment (the Fates have seen fit to smile on me in a number of ways of late). But I have participated actively there for years. I post there as “hocus” or “hocus 2009” or some such thing. I have had to re-sign up a number of times as board bannings come into and out of fashion.
I make it clear regularly that I oppose the Campaign of Terror against our board and blog communities. I was the first person to put forward a post urging Greaney’s removal from the community (on November 23, 2002!). So I like to think that I am fairly well covered on that side of things.
A number of people (even some Normals!) have questioned why I participate there. So long as I make it clear that I oppose the Campaign of Terror (I post yellow stickies on my computer screen to remind myself to do this from time to time), I am not able to see the harm in it.
In the introduction to one of my podcasts, I credit Drip Guy for bringing up the question that brought up the discussion generating the insights. There’s another one where I say the same thing about Schroeder. I recently posted a column at the Value Walk site that was sparked by a comment made by GW. And I can think of two articles at the site that originated in responses to things said by the big, bad Greaney Bear himself.
You want to put on your hip boots before heading over there. The smell can get to you if you don’t bring along your personal oxygen supply. But I cannot say that I have never learned anything from participating in some back and forth with those fellows (and witches). And that’s what it’s all about in the final analysis, in my assessment.
You might want to bring your b.s. detector too. I can imagine circumstances developing in which it might come in pretty darn handy.
Rob
In that case, maybe my comment sounds something like “Oh Mr. Smarty-Pants Know-it-all, I guess you wrote the Bogleheads wiki because your obviously such an expert on the topic.”
Um — that makes sense.
My guess is that it is probably something like that.
Hoo boy!
Rob
I just found out there is a link to my article.
Thanks much for the link to your article, Wade.
Thanks also for the link to the “Is Buy-and-Hold Dead” article.
Both of those are obviously helpful to all of us.
Rob
I checked out the Motley Fool article, Wade.
I thought you should know that the fellow who started that thread (“intecst”) is John Greaney. John is the leader of the Internet Sewer Rats on the Retire Early boards (Mel Lindauer is the leader on the Indexing boards). John is also the author of the Old School SWR study that appears at http://www.RetireEarlyHomePage.com site and the owner of the Goon Central board at which Drip Guy posts and at which the Sewer Rats decide on their strategies for attacking the various boards and blogs.
John and I are old friends (we built the Motley Fool’s Retire Early board — a board that was once as active as the Bogleheads Forum is today — together; he elected to burn it to the ground after hundreds of community members expressed a desire that honest posting on SWRs be permitted there. As Bob Dylan observed in his song I Shall Be Free #10, “I got a million friends!”
Rob
Hi Rob,
The front page of the NYT might be a bit unrealistic, but thanks though. First things first, the article should undergo peer review and (hopefully) get published.
I wrote this up for Bogleheads regarding David Blanchett’s new article:
There is an interesting related article to this topic in the new February 2011 issue of the Journal of Financial Planning:
Is Buy and Hold Dead? Exploring the Costs of Tactical Reallocation
by David M. Blanchett
http://www.fpanet.org/journal/….dHoldDead/
I read through it and he has an interesting take on the issue. First, he is saying that buy and hold is not dead in case that isn’t clear. He believes fixed allocations can beat tactical asset allocations on a risk adjusted basis.
While I am trying to remain agnostic on the issue, I can already guess why supporters of long-term valuations-based tactical asset allocation will not accept this article as a final word on the issue. It is because he is setting a success rate for tactical asset allocation (such as you get things right 70% of the time), and then uses Monte Carlo simulations to compare a fixed allocation to a tactical allocation in which you are randomly assigned the best performing asset allocation based on the probability. Supporters of valuations-based TAA will not care that you get (for example) 70% correct calls on a random basis, but (for example) your 70% correct calls come at vital instances where the markets are out-of-whack and will provide the important wins.
Also, the paper assumes that a new asset allocation can be made each month, which is more frequent that the kind of stuff I am considering.
He does also make an effort to consider taxes. He still has to make some assumptions about when to call what a capital gain/loss or income, but his approach to taxes seems pretty sound. I hope that by the end of the year I can treat taxes in an even more formal way than this article, but right now I can’t really say anything about taxes myself.
The front page of the NYT might be a bit unrealistic, but thanks though.
We disagree re this one, Wade.
There have been numerous articles on the front page of the New York Times reporting on the problems caused by the economic crisis. An article reporting on your research would be reporting on the solution to the economic crisis. I would think that the good people at the New York Times would be able to fit something on the solution in in once they came to understand that that is indeed what your research represents.
It may take another stock crash and a deepening of the economic crisis to open up their minds to the realities you report. But I don’t view front page action as being even a tiny bit unrealistic for when that happens (and I am not personally able to imagine a scenario in which it doesn’t happen sooner or later in one way or another).
Don’t forget the people who believed in you when it was just preliminary research being reported on an academic blog!
I’m kidding around a wee bit. But I am entirely sincere about the basic point here., Wade.
Our common sense tells us that Buy-and-Hold can never work. There have been hundreds of millions of dollars spent in recent decades trying to persuade us that we must ignore our common sense, that there is some sort of scientific reason for believing that things work in the opposite way from how common sense tells us that they must work. Now you have shown with numbers that, no, that is in fact not so — the science is in fact entirely in line with what common sense dictates must be so. Valuations really do affect long-term returns. Timing really is required for those hoping to have some realistic chance of long-term investing success.
That’s no small thing. You need at some point to spend some time thinking through the implications of your research, where it leads. I’ve been doing just that for nine years now and I can assure you that it leads to some amazing and wonderful places.
Once we get over this dangerous idea that there is some mystical, magical alternate universe where timing is not required (the core Buy-and-Hold belief), we free ourselves to discover scores of highly significant investing insights. Your research gets us over (at least intellectually, perhaps not emotionally in all cases just yet) the obstacle that has been holding back progress in this field for 30 years now (the idea that there might be some merit in Buy-and-Hold). You don’t yet appreciate how big a deal it is because you have not yet been able to spend much time on the other side of the Big Black Mountain. I have.
Rob
First things first, the article should undergo peer review and (hopefully) get published.
I’d like to see the article pass peer review. I’d like to see the article published. Those are good things.
But politics enters into the peer review process. And politics enters into publication decisions. Neither you nor I control the politics of this.
In the event that political considerations cause unfortunate things to happen, that doesn’t change the realities. The article reports on what the historical data says. The historical data says that Buy-and-Hold never works.
There are some who to this day view it as politically incorrect to say that. Politically correct or not, that’s the reality.
I don’t say that the politics doesn’t matter. The politics of Buy-and-Hold has caused great human misery. it matters.
But the realities matter too. That’s my point.
In the final scene, the realities triumph over the politics. I cheated, Wade. I took a peek at the last page of the story before I dared to put up that that May 13, 2002, post.
Did you think that I was just flat-out nuts?
Rob
While I am trying to remain agnostic on the issue
I’ve noticed that there are a good number of smart and good people doing that nowadays. I wonder why.
I don’t intend that as a personal dig, Wade. It’s an observation that I think people trying to make sense of all this should be mulling over.
So long as those who dare to say publicly that they are most definitely not agnostic on this issue are banned from further participation at the most popular hangouts, most of those we hear from will be True Believers in Buy-and-Hold and agnostics of one sort or another. Once the ban on honest posting is lifted, we will be seeing a whole big bunch of people suddenly coming to understand why it is that pure Get Rich Quick approaches have such a poor track record.
How do I know that this is how it will play out? it’s just another one of those funny little hunches of mine.
Rob
There is an interesting related article
I think it would be fair to say that it would be a whole big bunch more interesting if it examined an approach to valuation-informed investing that made a tiny bit of sense in the eyes of the people who advocate valuation-informed strategies.
Hey! Maybe this is the one that the good people at the New York Times will find room for on the front page!
For all of my undying optimism re the final result, I cannot say that that would astound and amaze and surprise me too much at this stage of the proceedings.
Oh, What John Bogle Hath Wrought!
Rob
the paper assumes that a new asset allocation can be made each month, which is more frequent that the kind of stuff I am considering.
Just a wee bit.
Rob
he is setting a success rate for tactical asset allocation
You often use this word “tactical,” Wade. Just about everyone who discusses these issues does that.
You of course need to use the words that you think most appropriate. Just for the record, though, I feel a need to note that I do not see anything even remotely “tactical” about the allocation shifts made by those following a Valuation-Informed Indexing strategy.
The single most important thing that an investor needs to get right is his asset allocation. It is a logical impossibility that someone following a Buy-and-Hold strategy could get his allocation right except during those times when valuations just happen by coincidence to be at levels that make the allocation chosen appropriate. An investor’s decision to employ human reason when making allocation choices is strategic, not tactical. It is the most strategic decision the investor makes.
Those who use the word “tactical” in discussions of this topic thereby suggest that they do not understand the reason why a rational investor must shift his allocation in response to big valuation changes — the 30 years of research showing that valuations affect long-term returns.
Again, you are in good company in your use of the word a “tactical,” Wade. I don’t know of anyone other than myself who uses the word “strategic” instead (I believe that John Walter Russell would be in my camp were he still with us). Still, I feel that I need to disassociate myself from use of the word “tactical” so that I don’t mislead any of my readers into believing that I find anything appropriate in the use of the word “tactical.”
I am not able to imagine anything less tactical than employing human reason to get your allocation right. Bringing human reason to bear on the analysis of investing questions is the ultimate strategic choice, in my assessment.
Rob
“Did you think that I was just flat-out nuts?”
Rob
I can’t speak for Wade, Rob, but for the record, I sure do. Your ACTIONS are what get you banned, not your views or philosophy or investing ideas. Since you refuse to acknowledge that, you will of course not only remain persona non grqatia at 15 or so boards, I strongly suspect you will continue to add to the list… a list which you perversely see as a point of pride, and not as the serious warning sign of a deteriorating mental state, that it truly is.
And you claim to be the author of the Bogleheads Wiki statement on safe withdrawal rates. Is that not right, Drip Guy? And I don’t believe that the owners of the Bogleheads Forum have raised any objections when you have put forward these claims.
John Bogle permits the people who own that board to use his name to promote their guidance to middle-class investors. And the group that owns the board turned over the responsibility to write a significant part of the community’s guidance on retirement planning to the fellow who wrote the words to the comment just above this one.
Am I stating things fairly here, in your assessment?
Rob
Hi Rob,
In looking at Wai Lee’s book, “Theory and Methodology of Tactical Asset Allocation,” what I see there seems to be in line with using the word tactical for valuations-based strategies.
Consider these two definitions from Wikipedia:
http://en.wikipedia.org/wiki/Asset_allocation
Strategic Asset Allocation – the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon.
Tactical Asset Allocation – method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains.
Now… I understand what you are trying to say: as valuations change, so does the expected risk-return tradeoff for long-term investors. Therefore, you want to use the word “strategic”. But in this sense, I think you are trying to redefine the generally accepted interpretation: strategic just mainly seems to be related to how someone chooses their fixed asset allocation (buy and hold). Tactical applies to changes in this. Again, I understand you point, but your point does require changing the commonly accepted understanding of “strategic”.
In other news, last night I thought of a different way to present results about VII. I’m going to program that in today and see what those figures look like. I have to consider more about the issue of what % of the time does VII get it right on a year-to-year basis.
Since my research isn’t finished, it would be irresponsible for me not to be agnostic. My null hypothesis is that valuations-based investing is not useful, and now I’m seeking to determine if I can find sufficient evidence to reject this null hypothesis with sufficient confidence. My blog post example is not enough, at least for me, and seemingly for many others too.
Best wishes, Wade
“Am I stating things fairly here, in your assessment?”
Rob
No, Rob, as usual you are not. But since you deleted my reply explaining why, it’s clear you are only asking in a rhetorical sense and really don’t care a whit about anything (including the truth)except getting your out-sized ego fed. Again.
it’s clear you are only asking in a rhetorical sense
I believe that I stated things fairly, Drip Guy. So, yes, the question was largely rhetorical. At the time I put forward the question I was not thinking it was any too likely that you were going to say anything that was going to change my mind.
But you never know for certain. I did believe that there was a small chance that you would surprise me in some way. I have had it happen with you. I have had it happen with Greaney. And of course there was a greater chance that you would say something that persuaded others but not me. We want to hear those sorts of comments. So the question was not entirely rhetorical. I entertained a slight hope that it might generate a helpful response.
The response that you put forward was not helpful as a whole, Drip Guy. There was one small bit of helpful content. You pointed out that a Wiki is a group project and thus not authored by one person. If you had said only that, the comment would have appeared and I would have thanked you for it.
Your comment had too much other garbage in it. If I permit that garbage to appear, I drive away people of intelligence and integrity. I want those people! So I am not going to permit stuff to appear that drives them away and that serves no good purpose.
If you post stuff that drives some people away because they don’t like the message but that also helps us learn (learning is sometimes a painful experience), it will show up. In those circumstances I am willing to live with losing some good people. But I am not going to lose good people so that posts containing such a high percentage of smelly garbage can appear here. That’s too high a price to pay for a post that is 95 percent smelly garbage.
I believe that the technology permits me an option of deleting the smelly garbage and letting the words in which you make a legitimate point appear. I’ve given some thought to doing that in cases like the one you presented me with in that last post. The problem there is that I am changing your message when I edit it and there is a risk since we all have biases that some bit of unfairness will sneak into the editing process. I don’t feel super comfortable with that approach.
There’s an easy remedy on your side. You can always resubmit a post with the helpful content intact and with the smelly garbage removed. There is no legitimate point that cannot be made without including smelly garbage. I have never banned a poster. Even the worst of the Internet Sewer Rats gets to speak here in each case in which he is willing to follow the universal rules of civil and reasoned discussion (the rules which according to the published posting guidelines govern every Retire Early and Indexing board).
So you have an easy means of getting your message out if you care to make use of it. And the price that our community would pay if I were to fail to protect them from the smelly garbage (the loss of community members of intelligence and integrity) is high indeed. Given how unbalanced the scales are here, I am going to continue to honor my promises to protect people from this stuff even when it means the loss of a small amount of slightly helpful material.
We all have our crosses to bear as we make our journey through the Valley of Tears.
Rob
I think you are trying to redefine the generally accepted interpretation
Yes. Precisely so.
You stated things exceedingly well in that comment, Wade.
I believe that Shiller’s finding (that valuations affect long-term returns) changed the history of investing. It stands all of the old thinking on its head.
All of the friction that we have seen is the result of the reality that people who have spent their lives studying under the old model are having a very hard time letting in how big a change we are talking about here.
The Buy-and-Holders are good and smart people. I respect them. I admire them. I feel gratitude toward them. I don’t say that sort of thing just to put forward some nice words to balance out the strong ones. I say that stuff because I believe it. If the Buy-and-Holders could see what I see, they would be as excited about where things are headed as I am. I wish I could figure out how to help them become able to see what I see.
All of the old books have to be rewritten. All of the old rules have been turned on their heads.
If valuations affect long-term returns, long-term returns can be predicted. Something that affects something else determines (at least to some extent) what is going to happen to it. When we know what determines something, we gain the ability to predict what will happen to it. Risk is uncertainty. To the extent we make stocks predictable, we take away the riskiness of stock investing. Stock risk is today to a large extent optional.
There is obviously nothing bad about this. It is good news piled on top of good news piled on top of good news.
The only problem we have ever had is that the news is so good that people just cannot bear to let it in. I cannot make the news less good than what it really is. That’s beyond my powers. We have an amazingly wonderful advance on our hands here, the biggest advance in the history of personal finance.
Think about when the humans gained the ability to harness the power of electricity. I have no doubt that there were skeptics about the wisdom of moving forward into the bright, warm, more action-filled world that had thereby been created.
“We never had light during the nighttime before — this must be from the devil!”
“Anything that can bring light to the nighttime is too darn powerful — people are going to get electrocuted, just you wait and see!”
“People have not had light in the nighttime for hundreds of years now so why do we now need it all of a sudden?– the people who came up with this must be crazy!”
And on and on. People fear change.
We can generate hundreds of excuses for sticking with the old way. But electricity was not from the devil. And changing your stock allocation in response to big price changes is not tactical. It is strategic.
The purpose is to get your stock allocation right, to choose the one that keeps your risk level constant. That’s key. There should be universal acceptance of the importance of that goal. There is no rational argument that can be made that keeping one’s risk level constant is a bad thing or even a non-mandatory thing. Getting your allocation right is the #1 goal. This is of STRATEGIC importance.
Making the point DOES require changing the commonly accepted understanding of what asset allocation decisions are strategic and tactical. It changes the commonly accepted understanding of just about everything.
It changes the commonly accepted understanding of what is involved in retirement planning. It changes the commonly accepted understanding of risk management. It changes the commonly accepted understanding of how risk and return interact. It changes the commonly accepted understanding of the differences between stocks and the other asset classes.
What do you think all the noise is about, Wade? You don’t see this sort of reaction when you are making a small point.
Why do you think Alex Fract views me as “a threat to the community”? Because I favor tactical asset allocation?
John Bogle is okay with tactical asset allocation.
So that’s not it.
Rob
I have to consider more about the issue of what % of the time does VII get it right on a year-to-year basis.
Valuation-Informed Indexing ALWAYS gets it right on a year-to-year basis, Wade. It’s impossible that it wouldn’t. VII is about picking the asset allocation that makes the most sense for an investor with your life goals, financial circumstances, and risk tolerance. It can never be a bad thing to pick that stock allocation.
It sounds from that statement (perhaps I am misreading it) You are not getting a fundamental point. Short-term timing DOES NOT WORK.
There are many years in which VII produces bad results. That’s not because there is anything wrong with VII. It is because there is something wrong with the market. The market is driven by emotion in the short-term. That’s why short-term timing never works. That’s why VII often performs poorly in the short term. No rational strategy can always perform well in the short term. You can have the precisely correct allocation and see poor short-term results.
If the Shiller model is right, there is never going to be a strategy that performs well both in the short term and in the long term. Buy-and-Hold (Get Rich Quick) is always going to perform well in the short term. Valuation-Informed Indexing (Rational Investing or Data-Based Investing) is always going to perform well in the long term.
You can’t have it both ways. Market prices are not determined by the same factors in the short term and in the long term. If you want to choose the right allocation for the long term, you are going to have to accept that you are sometimes going to have an allocation that produces poor short-term results.
That’s not because the allocation is “wrong.” The allocation is right. Good allocations sometimes produce poor short-term results in a market in which irrational forces determine short-term results.
Rob
Since my research isn’t finished, it would be irresponsible for me not to be agnostic.
Why?
I certainly agree that you should aim to keep an open mind.
But why would you need to be agnostic about Buy-and-Hold vs. Valuation-Informed Indexing?
Do you think that Fama is agnostic? Do you think Malkiel is agnostic?
I don’t get the sense that there are too many agnostics out there.
Rob
My null hypothesis is that valuations-based investing is not useful, and now I’m seeking to determine if I can find sufficient evidence to reject this null hypothesis with sufficient confidence.
You are putting your finger on the entire reason for the “controversy” with these words, Wade.
How the heck did Buy-and-Hold (the alternative to Valuation-Informed Indexing) ever become your null hypotheses? There has never been a sliver of data supporting Buy-and-Hold. And the idea that price matters with everything but stocks defies common sense.
Buy-and-Hold was a MISTAKE, Wade. There was never any data supporting it. There was never any logic supporting it. It was just a mistake. Had Shiller published his research 20 years earlier, there never would have been any Buy-and-Hold.
People did some research showing that short-term timing doesn’t work and JUMPED TO THE CONCLUSION that long-term timing doesn’t work either. They just failed to distinguish between the two. There has never been any indication that long-term timing might not work. The idea is revealed as silly, if you think about it for a few moments.
All of the research shows that short-term timing never works and that long-term timing always works. It is more true to say “Timing Always Works” than it is to say “Timing Never Works.” (The better thing to do is to distinguish between the two.)
For Buy-and-Hold to become the null hypothesis, someone should have had to present either a logical argument or some historical data in support of it. No one has ever done so.
The null hypothesis should be that price matters when buying stocks, just as it does when buying anything else. It is the Buy-and-Holders making the fantastic claim. They should be required to present something in support of their fantastic claim before declaring it the null hypothesis.
Rob
My blog post example is not enough, at least for me, and seemingly for many others too.
It depends on how you look at things, Wade.
The Bogleheads Forum has banned honest posting on the dangers of Buy-and-Hold. I think it would be fair to say that if anyone there were aware of any logical argument or any data that could be used to defend Buy-and-Hold that they would not have felt a need to take the extraordinary step of banning honest posting. So we can fairly say that not one of the Buy-and-Holders who posts at Bogleheads (this includes John Bogle, Mr. Buy-and-Hold himself) is aware of any logical argument or any data.
Now —
Is that enough for them to acknowledge that Buy-and-Hold has been a discredited strategy for 30 years (Shiller published research showing that valuations affect long-term returns in 1981)? Obviously not. The showing that the errors made in the Old School SWR studies were going to cause millions of failed middle-class retirements wasn’t enough. The second biggest economic crisis in U.S. history hasn’t been enough either. The prospect of us heading into the Second Great Depression hasn’t been enough.
I think it would be fair to say at this point that there is nothing that would be enough to persuade those who have earned fortune and fame pushing the purest and most dangerous Get Rich Quick scheme in history to say those magic words “I” and “Was” and “Wrong” short of massive political pressure brought to bear by those outside The Stock-Selling Industry who care about the future of an economic and political system that has served us all well for a long time.
I am not in The Stock-Selling Industry, Wade. I care about the future of our economic and political system and about the great human misery that the reckless promotion of Buy-and-Hold has caused so many millions of middle-class workers. I intend to do what I can to see that great political pressure is brought to bear on the stock-selling experts to see that they do come to learn how to pronounce the words “I” and “Was” and “Wrong” or at the very bare minimum “I’m” and “Not” and “Sure” before we are deep into the Second Great Depression and all the political turmoil that will follow from it.
In short, it is my intent to continue to post honestly about what the historical data says re safe withdrawal rates and other critically important investment-related topics. That one is non-negotiable. I believe that it is possible that I made note of that at one or two earlier points in the first nine years of our discussions.
Rob