The Economist Magazine Endorses New School Safe Withdrawal Rate Research

The Economist magazine has endorsed the New School approach to safe withdrawal rate research pioneered by John Walter Russell and me at the Motley Fool board back in May 2002. The article, titled The Wrong Number, states: “a safe withdrawal rate is very dependent on the valuation of the stockmarket at the retirement date.”

I discovered the analytical errors in the Old School research in the late 1990s, when I was putting together my Retire Early plan. I put forward the first internet post describing those errors on the morning of May 13, 2002. Russell posted a statistical analysis indicating that the Old School studies were indeed dangerously misleading on May 18, 2002.

Hundreds of community members expressed great interest in our findings and in exploring their significance to learn more about how the Buy-and-Hold Model got so far off track and about the direction in which investing analysis will be headed in the post-Buy-and-Hold Era. Numerous Buy-and-Holders, including the authors of one of the Old School SWR studies and of one of the Old School SWR calculators, reacted in anger and insisted that numerous investing discussion boards and blogs ban honest posting on the SWR matter and on other findings showing the failure of the Buy-and-Hold Model to explain accurately how stock investing works.

The result has been the most exciting and yet most contentious investing debate ever held on the internet, the series of discussions collectively referred to as “The Great Safe Withdrawal Rate Debate.” Insights developed my me and by hundreds of my fellow community members (including a good number of Buy-and-Holders or former Buy-and-Holders) led to the development of the Valuation-Informed Indexing Model, which is in the process of replacing Buy-and-Hold as the dominant model for making sense of stock investing questions. There are hundreds of articles and podcasts and blog entries describing the Valuation-Informed Indexing model set forth at this site.

I am gratified to see so many big-name publications coming around to publicizing the new ideas (based on the research of Yale Economics Professor Robert Shiller, who discredited the Buy-and-Hold model with his 1981 research showing that valuations affect long-term returns) on how investing works. The turning point in the discussions was the stock crash of 2008, which brought on the economic crisis and helped many Buy-and-Holders see that we need to acknowledge the errors in the Buy-and-Hold Model before we can move on to the development of a far more effective model.

There was a day when publications like the Economist feared to point out the dangers of the Buy-and-Hold Model and the retirement studies developed pursuant to it. We obviously have not yet made it safely to the other side of the Big Black Mountain. But I think it would be fair to describe the publication of this article as a significant step forward.

Thanks, Economist magazine!

And my thanks again to Wade Pfau, the researcher whose study was the focus of the Economist piece. Wade’s study is here.

The Bogleheads Forum has banned honest posting on safe withdrawal rates and on the academic research revealing the dangers of Buy-and-Hold in general. But the Forum permitted a thread on the Economist article (the ban has been softened since the economic crisis caused a wipeout of so much of the accumulated wealth of Forum community members) That thread is here.

I told you things would be getting better over time! People keep forgetting that I sneaked a peek at the last page of the story before I dared to put forward that famous (infamous?) May 13, 2002, post!


  1. Rob says

    I have a funny hunch that the joke you claim to enjoy so much is growing increasingly less funny in the minds of millions of middle-class investors, What.

    The full truth is that I believe that even somewhere inside you there is a voice that is telling you that it wishes that you had never got involved in the telling of this particular “joke.”

    Thanks for taking time out of your day to share your thoughts with us in any event.

    I think.


  2. what says

    I’ll be honest and admit I don’t understand a whit of your response but its fantastically funny all the same!

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