Yesterday’s blog entry reported on an e-mail that Academic Researcher Wade Pfau sent to me on May 2, 2011. My response, sent the same day, is set forth below.
Thanks much for the link. It’s no problem not to mention the article for a little bit of time. That’s trivial.
The Safe Saving Rate concept can effectively COMPLIMENT the safe withdrawal rate concept, but it cannot replace it. What do you do when someone who has never followed the Safe Saving Rate concept notices that on paper he has enough to retire but in reality he is nowhere close (because his portfolio is temporarily priced at three times fair value)? The properly calculated SWR tells the fellow what he needs to know. There’s got to be some tool we can use to warn people that, if they use unadjusted portfolio values to plan retirements, they will get killed. The natural choice is the safe withdrawal rate concept since the thing they are trying to figure out is whether a particular withdrawal rate is safe or not.
That said, there is separate value in the Safe Saving Rate concept. The SSR concept is giving people the long-view picture: How much do you need to save so that you will have a portfolio of sufficient size at the time you want to retire? The SSR concept is incorporating the temporary ups of overvaluation and the temporary downs of undervaluation into a single long-view number. Knowing that number certainly has value for planning purposes. But we still need to be able to tell people at the point of retirement whether they have saved enough or not. So we still need to be able to gain the ability to report the SWR accurately. And we certainly need to warn the millions who followed the discredited Old School studies and who are today likely in the process of seeing their retirements fail.
Kevin at the Out of Your Rut blog did a great job of addressing the underlying issue in clear terms in a comment that he put to my “Investing: The New Rules” column this morning:
Kevin: “A good friend of mine says that each of us has a certain “worldview”–a set of beliefs that makes the world go round, at least in our minds. When something happens or is said that disturbs that equilibrium, we lash out against it, desperate to establish that it isn’t true.”
That’s the real story, Wade. That’s the issue that everyone of us involved in some way in teaching people effective stock investing strategies in the year 2011 needs to be dealing with. Once we begin talking openly about the emotional pain that
the Buy-and-Holders are feeling, we can get over the hurdle that has been holding back progress for 30 years now. There is not one person alive who does not deep in his or her heart want to see that happen. We all just need to summon up the
courage and grace and love and honesty and community spirit needed to make it happen.
Please just keep fighting the good fight. My sense is that the work you are doing is 20 times more important than you are able to realize today. Once we get to the other side of the Big Black Mountain, things just get better and better and better and better. It’s all downhill sledding once we collectively figure out how to say the words “I” and “Was” and “Wrong.” And we are getting closer to that wonderful turn in the history of our knowledge of how stock investing works all the time.