Set forth below is the text of a comment that I put to a blog entry at Wade Pfau’s site titled Trinity Study Updates:
we will not know if there is going to be an increased failure rate for another 20-30 years.
This statement is of course 100 percent true. However, I have a different and I think far more realistic and prudent and proper way of looking at things.
A safe withdrawal rate study is not supposed to tell us what withdrawal rate may work. It is supposed to tell us what withdrawal rate absolutely will work (presuming that stocks perform in the future as they always have in the past). A possibility that has only some small chance of coming to pass cannot properly be referred to as one that may “safely” be assumed. When aspiring retirees turn to research to learn the safe withdrawal rate, they are seeking to learn the withdrawal rate that will work in a worst-case scenario, not a best-case scenario or even a typical scenario.
In the past, valuations have always affected long-term returns. So the proper way to look at this question is to apply a valuation adjustment and see how well the 4 percent rule works then. The answer is — presuming that stocks perform in the future as they always have in the past, there is a 30 percent chance that a 4 percent withdrawal rate will work for retirements that began at the top of the bubble (January 2000).
Yes, there is a chance that the 4 percent rule will “work” for a third time. But those who are willing to speak frankly about these matters can say today that the odds are very much against it. The Old School safe withdrawal rate studies tell us not the safe withdrawal rate but the withdrawal rate that may or may not work depending on what sort of return sequence happens to pop up. Those are two very, very different concepts.
In the event that stocks perform in the future as they always have in the past, we are likely to see millions of failed retirements as a result of the analytical errors contained in the methodologies employed in the Old School studies. It is my strongly held view that everyone in this field should be doing all he or she can to urge the authors of the studies to make corrections and to warn the millions of retirees who have used these studies in their planning efforts of the dangers associated with using them.
William Bernstein, author of The Four Pillars of Stock Investing, once said that those considering making use of one of these studies to plan a real-world retirement would be well-advised to “FuhGedDaBouDit!” You gotta love a New Yawker’s way of getting to the heart of the matter in a whole big bunch fewer words than I put forward in this blog comment!
Rob
Wade says
Rob,
Perhaps the Trinity study was not meant to be a “safe withdrawal rate” study. The word “safe” does not appear in either the original or updated versions. Perhaps the study was only meant to point out that 6-7% withdrawal rates are not safe. So my list of concerns in my updated blog post is meant to point out what I feel are issues that users of the study must consider before jumping to the conclusion that the study provides information about “safe withdrawal rates” for the future. Though I feel they could be more vocal about this matter, the Trinity authors never really gave any indication that forward looking retirees should treat 4% as safe. It’s up to our interpretation as users of their findings.
Rob says
The study uses a word very similar to “safe,” Wade. I believe the word it uses is “sustainable.” People just shortened that to “safe.” The two words mean essentially the same thing. A 4 percent withdrawal rate is no more sustainable than it is safe for retirements that begin at times of high valuations.
There are millions of people who are likely going to suffer failed retirements because of the demonstrably false claims put forward in the Trinity study, Wade. We have also seen numerous discussion boards burned to the ground because the authors of discredited studies and calculators based on the Trinity study did not want people to find out about the errors they made in them. The Trinity study and all the studies and calculators based on it should have been corrected when the errors in them were first made public (May 2002).
You are suggesting that the thousands of experts in this field who heard people calling the number generated by the study the “safe withdrawal rate” never corrected the record — Why? This doesn’t add up. If this was just a question of people using the wrong word, someone would have spoken up many years ago.
The reason that the authors of the study got the numbers so wildly wrong is that the authors of the study believe in the Efficient Market Theory. Under the Efficient Market Theory, stocks are always priced rationally and properly. Thus, both overvaluation and undervaluation are meaningless concepts.
We know that this is the reason for the errors because this same error (a failure to account for the effect of valuations in an investing analysis) was made in the examination of many other questions. For example, you see this error made in 90 percent of the analyses you see relating to what stock allocation is best (see, for example, the entire book Stocks for the Long Run).
Are we going to say that there was some mistaken terminology used throughout the entire book Stocks for the Long Run? No. Siegel was influenced by the Efficient Market Theory into thinking that there is no need to consider valuations when setting one’s stock allocation, just as the authors of the Trinity study were influenced by the Efficient Market Theory into thinking that there is no need to consider valuations when planning one’s retirement.
The error at the core of the Efficient Market Theory is fundamental. It has influenced every aspect of investment analysis for decades now. It needs to be corrected, not rationalized.
I agree with you 100 percent that the intent of the authors of the Trinity study was to point out that 7 percent withdrawal rates are not safe. The same is true of the authors of the follow-up studies and calculators. When you talk about intent, you move from the objective realm (the study gets the numbers wrong) to the subjective realm (the authors were trying to do a good thing). There’s no doubt in my mind that the vast majority of the people promoting the Efficient Market Theory (perhaps every last one of them) have good intent. It’s possible for someone to have good intent and still get something wrong. That’s what has happened here.
The real trouble has been the difficulty that people have experienced acknowledging the error. It is only by acknowledging that we don’t know everything that we are ever able to learn anything new. So discovering errors we have made opens up wonderful growth opportunities. The question we should all be reflecting on is: Why is it that in the investing field it is so darn hard for people to acknowledge obvious analytical errors (Shiller published research in 1981 showing that valuations affect long-term returns)?
I believe that, ironically, the reason is because investing is so darn important. If the errors didn’t matter, the people who made them would be happy to correct them. The errors we are talking about here are HUGE in their effect. It is the widespread promotion of Buy-and-Hold investing strategies that was the primary cause of the economic crisis. As you point out, the people who published these studies did so with good intent. Now they are being asked to acknowledge that errors they made played a big role in causing the second biggest economic crisis in U.S. history. That’s a lot to swallow.
To understand how humans react when they are faced with having to swallow that much, you need to go outside the literature published in the investing area or even the economics area and read the literature published in the field of human psychology on the phenomena of cognitive dissonance. Widespread cognitive dissonance is the only possible explanation of the behavior we have seen from so many otherwise good and smart people over the course of the past nine years.
Should we be charitable to people suffering cognitive dissonance? Of course. Obviously. They are fellow humans in pain. Our job is not to make them feel bad but to take them to a place where they can begin for the first time in a long time to feel a whole big bunch better.
Is it an act of charity for us to engage in word games that permit us to pretend a little while longer that the studies are not in error? It is not. That is an act of cruelty.
The next step is another price drop of 65 percent. A price drop of that size on top of what we have already seen is likely to put us in the Second Great Depression. How are the authors of the Trinity study (and all those who have put forward convoluted rationalizations on their behalf over the course of the past nine years) going to feel about themselves after they are forced to add to their record that they caused the Second Great Depression because they were not able to work up the courage to say the words “I” and “Was” and “Wrong” about a numerical error they made in a retirement study? Putting off recognition of the error just makes things far, far, far worse than they already are.
There IS a life-affirming way to proceed. The ultimate reality here is that we now have available to us the most effective investing strategy the world has ever had available to it (Valuation-Informed Indexing). If we could publicize VII, we could restore the confidence of middle-class workers that their retirement plans are going to work out. If we did this, we would be within six months looking at this economic crisis in the rear-view mirror. I think it would be fair to say that, once we did that, there wouldn’t be too many focused on any of the boo-boos made at earlier times.
And there’s more. When people wrote the history of how we got to the wonderful place that we can all go to for the price of acknowledging that humans are still capable of making mistakes, they would need to acknowledge that the authors of the Trinity study (and all the follow-up studies and calculators) played an important role in getting us there. Humans don’t learn all there is to know about a subject in one attempt. As you point out, the Trinity authors taught us something important — that 7 percent is not safe. People who came later built on that work and taught us even more — that even 4 percent is not safe at times of insanely high valuations and that even 9 percent is safe at times of insanely low valuations. No, the Trinity authors did not say that in their study. But they played a key role in the story and fair-minded people are going to acknowledge that.
But they can’t very well acknowledge it today, can they?
They can’t acknowledge it today because it isn’t so today. It isn’t so because we cannot move forward to learning what we need to do to enjoy far higher returns with far less risk UNTIL WE GET ABOUT THE BUSINESS OF BUILDING A NATIONAL CONSENSUS THAT VALUATIONS AFFECT LONG-TERM RETURNS, THAT THE EFFICIENT MARKET THEORY IS THUS INVALID AND THAT BUY-AND-HOLD IS THUS (HOWEVER MUCH THIS MAY BE CONTRARY TO THE INTENT OF THE PEOPLE WHO CAME UP WITH IT) THE PUREST AND MOST DANGEROUS GET RICH QUICK SCHEME EVER DEVELOPED BY THE MIND OF MORTAL MAN.
That’s the price of admission, Wade. I don’t say that because I am a meanie. I say it because I am an anti-meanie. There is no other way to take this to a good place. I have spent every day of the past nine years trying to think up some other way, some way that lets people not have to say The Three Magic Words, and there simply is no other way. If we can reach a consensus that The Three Magic Words really must be spoken, we thereby enter a very magical place for all of us — high investment returns at minimal risk, huge economic growth, an end to the economic and political crisis, thousands of new studies and calculators and blogs and books and discussion boards that describe strategies that actually work in the real world. If we cannot work up the courage to do that, we in all likelihood bring on the Second Great Depression and only the devil himself knows what horrors follow from that.
I say that the Trinity authors got all the numbers wildly wrong. Not by intent. They were in the company of a whole big bunch of good and smart people in thinking that the Efficient Market Theory was valid. But it is not. There is now a mountain of evidence showing that valuations affect long-term returns and precisely zero rational grounds for believing otherwise. I believe (strongly) that we all need to move on.
Scott Burns once told me that he viewed my effort to let middle-class investors know what the historical data really says about safe withdrawal rates as “catastrophically unproductive.” I don’t agree with Scott re this one. I see the efforts of all those (including Scott) who have helped with the cover-up as “catastrophically unproductive.” I love learning. That’s why I became a journalist. I love asking questions, learning the answers to them and sharing what I have learned with others. It fills my heart with joy that we have learned so many wonderful things about how stock investing really works during the first nine years of our SWR discussions. My strong hunch is that we will all be working together to learn a whole big bunch more in days to come. I very much look forward to the experience.
I have a funny feeling you are going to be right in the middle of all the good, exciting stuff that will soon be going down, Wade. We are getting close to the time when the real fireworks (the good kind!) begin! Let’s all let that in and put this ugly rationalization junk behind us once and for all.
Rob
Wade says
Rob, DRiP Guy kind of won me over with his discussion of scope vs. error at Bogleheads. Well, I think no one really knows the precise scope that the Trinity authors had in mind when they first formulated their study. But if their scope was only to look at how things worked out in the historical data, then there is no error. I mean, I’ve replicated their study and didn’t find errors in their calculations. So there is no error in that regard.
The error comes if people apply those success rates incorrectly to future retirements. I don’t know how the Trinity authors feel about the points you make regarding valuations. Perhaps they agree with DRiP Guy that valuations do not make an important difference, or at least that they do not provide a clear difference that can be correctly acted upon. But I still think there are other reasons to be worried about 4% (fees, international perspective, …) besides just the valuations issue.
This is where I wish the Trinity authors would be more vocal. But even so, the 4% rule is so ingrained into the national consciousness that even if they said something now it would have very little effect.
The duty is for others to come along and explain why they believe that the Trinity study does not provide the whole story about retirement planning in a forward looking manner.
That’s what you are doing. But in doing that, you don’t need to convince the Trinity authors to fix any errors. Just build on their earlier work. Which you did with your retirement evaluator.
As well, as the discussion at Bogleheads is now heading: the whole SWR debate is built on a rather artificial premise that people use a portfolio of risky assets to finance a clearly defined set of planned expenditures. In real life this isn’t how things work.
Rob says
Thanks for your response, Wade.
I strongly disagree with every word.
I want to put up a fuller response. But I am about to quit for the night. I also expect to be out of commission for much of the day tomorrow. So it’s possible that I will not get that fuller response up until Saturday.
Rob
Wade says
Okay, have a good night.
I hope you don’t disagree even with the “That’s what you are doing” words. 🙂
Remember, we do share the concern that 4% will prove to be too high for recent retirees.
So it’s just a matter of how to best go about disseminating this information.
Instead of convincing the Trinity authors to re-do their study with your methodology, just do the study yourself and let people decide which approach is most convincing.
Again, you have already done that, I know, with the retirement risk evaluator.
Rob says
The error that was made was an analytical error.
It was not an analytical error that was made only by the Trinity authors. It was an analytical error that was made by John Bogle. And Bill Bernstein. And the editors of Money magazine. And by thousands and thousands of other good and smart people. It was an analytical error that caused the second worst economic crisis in U.S. history (one that is very much in its early days and likely to become far, far worse in the event that stocks perform in the future anything at all as they always have in the past).
Certainly we want to hear the Trinity authors themselves explain what was going through their minds when they set up the methodology of their study. I have suggested that Money magazine start a new feature where each month someone steps forward and writes an article titled “I Was Wrong” in which he explains what was going through his mind during the Buy-and-Hold days. Bogle should do it the first month. Then we would move on to people like the Trinity authors. I would like to see Shiller do one. Shiller is not perfect. He has made mistakes. I am happy to do one if there are people who want that. I did not understand this all on the first day. I have had to move forward one step at a time just like all the other humans. I think it would be a good thing if you did one, Wade. I think you would acknowledge that you do not today know it all. You would help people if you wrote an article working through the process by which you went from holding a Buy-and-Hold mindset to holding a Valuation-Informed Indexing mindset (or whatever you want to call the new mindset — the terminology is of course not what is important here, the important thing is the attitude).
We all need to become more HUMBLE re the extent of our understanding of how stock investing works.
That is our single most important finding of the past nine years.
The Trinity authors need to become humble enough to be able to say the words “I” and “Was” and “Wrong.” If they are able to do that, there is no limit to the good they can do by doing so. If they are not able to do that, we need to say prayers for them and move on without them. There are many millions of people who have been hurt in very serious ways by the same analytical error that caused the Trinity authors to get the numbers so wildly wrong in their retirement study. Those people matter too.
To the extent that your point is that we should be charitable to the Trinity authors, I am of course with you 100 percent. It was not their intent to make any errors. As you pointed out, their intent was to improve our understanding of retirement planning. And, when you look at this in sweeping historical terms, they did indeed do that. We should of course be grateful for the work they did. But we cannot ignore the harm that was done to millions of aspiring retirees by the mistakes they made. Ignoring that is going to down the road cause a political explosion that may well tear our society apart.
I read an article just this morning about the Donald Trump phenomenon. The guy was saying that Trump is popular because middle-class people are becoming angry about what has happened to them and about the failure of their political leaders to handle matters more effectively. What do you think is going to happen when large numbers of them come to learn that we have had research for 30 years now showing that Buy-and-Hold is the most dangerous Get Rich Quick scheme ever concocted by the mind of mortal man and yet The Stock-Selling Industry continued spending hundreds of millions of dollars promoting it day and night in every possible venue? You don’t see a problem here bigger than the hurt pride of the Trinity authors?
You get it exactly right when you say that the goal should be teaching people what works. That is indeed what I need to be doing and what you need to be doing and what every person involved in this field needs to be doing. How do you propose we go about it?
You have been participating in an SWR thread that has been going around in circles for hundreds of posts. I have participated over the course of nine years in HUNDREDS of such threads. Why do they always go around in circles, Wade?
It’s because the Buy-and-Holders are in great emotional pain. They believed. And they are hurt to find out that they were wrong to believe.
That’s a reality of all this. The intense human pain that the promotion of Buy-and-Hold brought on is every bit as real as the numbers in the historical data. Anyone who is unwilling to deal with that pain lacks the ability to do good work in this field. I say that not as any sort of dig at you or anyone else. I say it because I know it is so. I have learned this through my interactions with tens of thousands of Buy-and-Holders over the past nine years.
I can go this morning to any web site on the internet (except for the ones where I am banned) and report the realities of stock investing. That’s nice. But I can tell you in advance the questions I am going to be asked when I report those realities.
The #1 question I am going to be asked is: “But, Rob, timing doesn’t work, does it?” To say that timing doesn’t work is to say that looking at the price of the stocks you are buying doesn’t work. It’s pure 100 percent foolishness. Yet some of the smartest people in the world believe this. I mean no offense, but I think it would be fair to say that there are certain ways in which you kinda, sorta still believe it. Heaven help us all, but I believe that there may be certain ways in which I kinda, sorta still believe it.
We’re not going to be able to move on until we deal with that question. People believe that timing doesn’t work because they have heard this claim 10 millions times and they have never heard it corrected. Their emotions are telling them that anything said that many times by that many smart people MUST be true. We need to explain how it came to be that they heard this complete nonsense claim millions of times and yet never heard it corrected.
There are a number of elements to the explanation but the biggest factor is cognitive dissonance. The Trinity authors didn’t sit down at their desks one day and say: “You know what might be fun, what if we got the numbers wildly wrong in a retirement study and caused millions of failed retirements?” They believed in Buy-and-Hold. They believed in the Efficient Market Theory. They believed in Modern Portfolio Theory. That’s why the numbers are wrong in the study. That’s why we are living through a global economic crisis today.
The next stop is another 65 percent drop in stock prices. That’s almost certainly going to put us in the Second Great Depression. Large numbers of people are going to become very angry. Some of those people are going to get caught up in their negative emotion and not be even a tiny bit as charitable as I am being in trying to come to a reasoned and fair explanation of why the Trinity authors (and many, many others) got so many things so wildly wrong for so many years. My take is that it is 10 millions times better to bring this to a head today and to handle it in a loving way before things get so bad that others handle it in a non-loving way and cause political frictions the likes of which we haven’t seen since the Civil War.
Of course, I only get one vote, Wade. That’s my vote. I will always reach out the hand of kindness to all Buy-and-Holders. I will always express my gratitude for the wonderful work they have done helping us get to this place where we are today able to invest in ways so much more effective than anyone has ever been able to invest before. If my voice is not strong enough to persuade other good and smart people to join the effort to bring this to a good place, then that’s what the Fates decided re this matter and I just need to accept it.
I’ll keep trying. And I know you will too. I personally believe that we will all get to the other side in one piece. I don’t say that I am 100 percent confident re that one. But that’s my (willfully?) optimistic take. I know that I want to have my name written down as one of those who was on the side saying that it was well worth saying the words “I” and “Was” and “Wrong” to bring on such wonderful breakthroughs and to avoid the human suffering that I believe will follow from continuing to duck these questions.
I sincerely thank you for sharing your thoughts and for thereby prompting me to organize mine a bit for their presentation here. Keep fighting the good fight however you see best to fight it, my good friend!
Rob