I’ve posted Entry #225 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s titled Today’s Investors Have Little Idea What Makes for a Safe Retirement.
Juicy Excerpt: The key point of the article is to point out that most financial planners have lost faith in the “4 percent rule,” the claim that retirees can safely take out an inflation-adjusted 4 percent of their stock portfolio to cover their annual living costs. This is of course a good thing. It is likely that we will be seeing millions of failed retirements because of the heavy promotion of the long-discredited studies advocating the 4 percent rule. But the Schwab article does a poor job of explaining how the 4 percent rule came to let us all down.
The article cites two reasons why following the 4 percent rule is now widely considered to be a bad practice: (1) Market conditions are different; and (2) The sequence of returns that an investor sees can have a big effect on the withdrawal rate that will work for him. I am a huge critic of the 4 percent rule. I was arguing that it was a dangerous rule back in 2002, nearly ten years before the Wall Street Journal and scores of other big-name publications jumped on the bandwagon. But I feel compelled to say that the Schwab article is not being even a little bit fair to the authors of the studies that were once thought to support the 4 percent rule.
Anonymous says
Big news today. Triple digit loss in the market and trading was halted. Looks like you should be receiving that $500 million check any day now. What’s the first thing you are going to buy with that money?
Rob says
You’re focused on the short term, Anonymous. That’s your mistake.
If the P/E10 level were 7, the news of what is happening in Greece could cause the market to go up. The psychology could be: “This is a sign that we are getting the last of the bad stuff out of the system and things are going to go well from here on out, so I want to go to a high stock allocation and profit from that.”
Economic developments affect stock prices. But not directly. The economic developments must pass through an emotional filter that determines what sort of effect they have. The P/E10 level tells you what sort of filter is being applied.
The fact that trading has to be halted tells you that we are doing this wrong. The market wants to get the price right. If we get the price right, trading will never have to be halted.
We need one thing to get the price right. We need to be able to share information about what the last 34 years of peer-reviewed research says at every board and blog on the internet. When we reach a consensus to enforce the laws of the United States, we are on our way.
People get things wrong. None of us are perfect.
The Buy-and-Holders got one wrong. While getting a lot else right.
We should thank them for all the stuff they got right, ask that they promptly and kindly correct the one thing they got wrong, and get on with our much-enhanced-by-the-peer-reviewed-research lives.
My take.
Rob
Rob says
The first thing that I am going to buy with the money is an American flag.
Because I love my country and all that it is about.
And I am going to put a photo of Jack Bogle’s face where the stars usually are.
Because Bogle will be working with us following the crash. And he is my hero. And he is a hero of our entire country. And I want everyone to know that and to pay him the respect and affection that he has earned.
If he is in prison, I will send him a photo of the flag with his face on it so that he can receive the warm feelings that he is entitled to even during his prison years.
That’s the middle ground. That’s charity combined with honesty.
Again — my take.
Rob