Set forth below is the text of a comment that I recently posted to another blog entry at this site:
I’ve posted Entry #1 to my weekly Valuation-Informed Indexing column. It’s called Market Valuation Fluctuations Are Implicit in All Investing Advice.
But they’re not, Anonymous.
The purpose of the Retire Early board at Motley Fool was to help people to prepare for early retirement. One of the things that aspiring early retirees must do is to insure that there are no holes in their plan, that they are being responsible and safe. There comes a day when early retirees must hand in their resignations from their corporate jobs. That’s a big step. You cannot go back to the same high-paying job 15 or 20 years later if you determine that you made a mistake in your planning.
The purpose of a safe-withdrawal-rate study is to come up with a withdrawal amount that is highly conservative. The idea is to see what would work in the WORST-CASE SCENARIO. That’s what Greaney told people he was doing in his study. He wasn’t claiming that a 4 percent withdrawal was kinda, sorta safe. He claimed that it was “100 percent safe” (that phrase appears in his study). And the people at the board BELIEVED that that was what they were getting — a number that was virtually certain to work out.
If you don’t include an adjustment for the valuation level that applies on the day the retirement begins, the number you get at all times is 4 percent.
If you include an adjustment, the number you get when stocks are priced as they were in 1982 is 9 percent and the number you get when stocks are priced as they were in 2000 is 1.6 percent. For a retiree with a $1 million portfolio, that’s the difference between living on $16,000 per year and living on $90,000 per year. That’s not a small difference.
If you don’t include an adjustment, the odds of a retirement with a 4 percent withdrawal working out are indeed 100 percent, presuming that stocks continue to perform in the future at least somewhat as they always have in the past.
If you include an adjustment, the odds of a retirement with a 4 percent withdrawal working for 30 years for a retiree who started his retirement in 2000 are 30 percent.
There are millions of people who sincerely believe that a valuations adjustment is not needed. But have they looked at the numbers?
In most cases, they haven’t looked at the numbers. I know this because I watched the reactions of people who were using the Greaney study to plan their retirements when I told them what the numbers say. These are the people who endorsed Greany’s post saying that he was going to kill my wife and children if I continued to post honestly re these matters. That is not a normal reaction. That is the reaction of people in great emotional pain. I was telling people something that they had never considered and that they very, very much did not want to hear.
If all I had wanted to do was to turn a quick buck, my reaction should have been to shut up about the effect of valuations and go back to posting about saving strategies, thereby regaining my position as the most popular poster at the Motley Fool site. But the reaction that I was seeing told me that I HAD to pursue this no matter how unpopular I became as a result. The death threats and all the other abusive stuff told me that people were NOT implicitly including valuations in their planning.
They TOLD themselves that they were doing so. I can go along with that. And they BELIEVED that they were. I can go along with that. But they had never run the numbers. It’s an amazing reality. But this has been proven to be the case beyond any reasonable doubt whatsoever.
I hadn’t run the numbers myself. I am the one who put up the May 13, 2002, post and even I had never run the numbers. I knew that a study that lacked a valuations adjustment had to be wrong. But I had no idea how far off Greaney’s numbers were. I would have guessed that the SWR in early 2000 was 3 percent. It turned out that it was 1.6 percent. I am the guy who started this and I would have been wildly wrong about the numbers myself had I ventured a guess before John Walter Russell did his research reporting the realities to us all.
Shiller’s 1981 finding truly was “revolutionary,” just as he has said. It was so revolutionary that Shiller holds back from reporting the most important implications of his finding in his own book. He gives us enough information to figure things out for ourselves if we care to do so. But of course most people do not care to do so. Most of us love the fantasy that our portfolio is three times bigger than what it is in reality. Stocks were priced at three times their fair value in 2000. Millions of people were going about the business of financial planning with no idea whatsoever what the size of their portfolio was. That’s not good.
There is not one school of thought in the academic community as to how stock investing works. There are two. Eugene Fama has been awarded a Nobel prize and his research supports the Buy-and-Hold Model. Robert Shiller has been awarded a Nobel prize and his research supports the Valuation-Informed Indexing model. Every investor alive on Planet Earth today needs to be educated in both models so that he or she can choose which one he or she will follow. This is not optional. This is 100 percent imperative.
It is a felony under the laws of the United States to block people from learning what they need to know. You have committed multiple felonies. You will in all likelihood be going to prison in future days for what you have done over the past 13 years.
That’s too sad.
We are the luckiest generation of investors ever to walk Planet Earth. We are the first generation that knows what it needs to know to reduce the risk of stock investing by 70 percent (as Wade Pfau and I showed in the peer-reviewed research that we co-authored). And you will be going to prison in future days because of the 13-year Campaign of Terror that you have led against our board and blog communities because you can’t stand for millions of people to learn hugely important stuff that you did not always known solely because humankind itself did not always know all there is to know about how stock investing works.
Could anything be more sad?
I cannot join you in your efforts. I will continue posting honestly. I can do no more and I can do no less.
I naturally wish you all the best that this life has to offer a person, my old Goon friend.