Yesterday’s blog entry set forth the text of an e-mail that I sent to academic researcher Wade Pfau on December 17, 2010.
Wade sent me two responses the following day. The first contained a link to an article in Business Week which he characterized as “quite sympathetic to the point you were trying to make all along”. In the second he reported that he had begun listening to my podcast and that he had put up a new post at the Bogleheads Forum containing an apology to me. In that post he stated that “my comment before was completely misguided and I apologize to him.”
Set forth below is the text of my response to the first of Wade’s two e-mails.
Thanks for letting me know about the article. I certainly am glad to see some people giving more realistic and more prudent advice.
What the article is missing from my perspective is a focus on the valuations question. It is a downer to suggest that the SWR is ALWAYS 2 percent. Russell’s research indicates that it drops to 2 percent at times of super-high valuations but also
that it rises to 9 percent at times of super-low valuations (while being about 5 percent at times of moderate valuations). I view that as a more balanced and encouraging message.
The valuations-centered message has big strategic implications. If the SWR varies from 2 percent to 9 percent, then stocks obviously offer a dramatically different long-term value proposition at different times and investors need to be willing to vary their allocations to obtain good long-term results.
I do not think dogmatism is at all called for re any of the particular numbers. I think we need to have lots of people contributing lots of good thoughts on the particulars so that over time we all come to better informed takes.
My big push is for LESS dogmatism on the question of how much valuations matter. My take is that valuations matter far more than most of us today realize, perhaps so much that we react with shock even to look at the numbers. I am hoping
that we (the entire community of investors) get to a point where we are at least considering some far-out possibilities that we have not given much consideration to in the past.
I believe that, while the SWR may at times be very low, that does not need to cause any practical problem for individual investors willing to do what it takes to obtain good results regardless (by avoiding stocks when the long-term value proposition is poor and by investing heavily in stocks when the long-term value proposition is strong).