Set forth below is the text of a comment that I posted in response to a question posed in the discussion thread for one of my Beyond Buy-and-Hold columns at the Out of Your Rut site:
I look forward to reading everyone’s thoughts on improvements that can be made to the methodology that goes in to these types of analyses
Re the methodology question, my take is that those who do studies of stock investing questions should always disclose what sort of methodology they are using. Buy-and-Hold studies are rooted in University of Chicago Economics Professor Eugene Fama’s Efficient Market Hypothesis and thus do not contain adjustments for the effect of valuations. Valuation-Informed Indexing studies are rooted in Yale Economics Professor Robert Shiller’s research showing that valuations affect long-term returns and thus always contain valuation adjustments. The two types of studies obviously always produce wildly different findings.
The important thing is that the readers of the studies be made aware that they are not reading scientific truths but tentative findings depending on a belief in one of the two models. The Old School safe withdrawal rate studies don’t reveal metaphysical truth re SWRs, they just tell us what those who believe in the Buy-and-Hold model believe the SWR to be. The New School SWR studies tell us what the SWR is for those who believe in the Shiller model.
All of the disputes that have raged for over nine years now are the result of the failure of researchers and investing experts to note that their studies are valid only if the premises on which the methodologies of those studies were built are valid. I believe in the Shiller model. So I obviously cannot say that I believe that the Old School studies are valid. It would be dishonest of me to do that. Each community member has to say what he or she sincerely believes to be the case. This should not be controversial!
Buy-and-Hold is rooted in a belief in the Efficient Market Hypothesis (Shiller had not yet published his research at the time Buy-and-Hold was developed). Buy-and-Hold is not Truth with a capital “T.” It is just an hypothesis that many smart people have over the years come to believe is true. All research done in this field should specify the model in which it is rooted. It is imperative that the investors making use of investing studies know that there is another model that produces research generating very, very different findings.