Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Isn’t it fraud to say 4% won’t work? After all, you have admitted that predictions fail.
No predictions are made in the calculation of the safe withdrawal rate. The return scenarios that have applied in the historical record are considered and the withdrawal rate that barely works in the event that the worst-case return scenario happens to pop up starting from the valuation level that applies on the day the retirement begins is identified as the safe withdrawal rate.
The mistake that the Buy-and-Holders made was to consider only the one particular return scenario that happened to pop up in the historical record. For example, the highest valuation level we experienced prior to the late 1990s was the “33” that applied just prior to the onset of the crash of 1929. In that case, we saw a lucky return scenario pop up and a 4 percent withdrawal barely survived. However, the 4 percent withdrawal survived at that valuation level only in 50 percent of the return scenarios that we have seen in the historical record. There was a 50 percent chance that a retirement beginning in 1929 that used a 4 percent withdrawal rate would fail. A retirement with a 50 percent chance of failing is obviously not safe.
I don’t need to make any predictions to say that. I just look at the historical record. No predictions are needed because I choose the worst-case scenario. It is usually the case that a withdrawal rate not identified as “safe” has some chance of working out. I could predict that a lucky return scenario would pop up and that an unsafe withdrawal rate would in fact work out. But that’s not safe withdrawal rate analysis. The literature defines the concept as calling for examination of what happens in a worst-case scenario. It is because the investor is finding out what happens in a worst-case scenario that he views the withdrawal rate identified as a safe one.
I hope that helps a bit, Anonymous.
Rob
Anonymous says
Yet another article that says you are wrong, Rob.
http://svrn.co/blog/2017/5/14/waiting-for-the-market-to-crash-is-a-terrible-strategy
Rob says
Today’s P/E10 value tells us to expect to see THOUSANDS of articles like this, Anonymous.
How else do you think we GET to today’s valuation levels?
If we taught investors to act rationally, they would ALWAYS take price into account when buying stocks and prices would never get to such crazy levels. To get to the crazy place where we are today, we have to have lots of articles telling us that it is okay to be irrational. That doesn’t come naturally.
Rob
Anonymous says
And can you tell us how his data is wrong?
Rob says
It’s not his data that is wrong. It’s his thinking process that is wrong. This fellow is testing what John Walter Russell referred to as “Idiot Switching.” Idiot Switching never works. For obvious reasons.
The thought process behind Idiot Switching is that overvaluation is irrational and that the irrationality should be exposed by the market and that the smart investor should therefore be able to exploit this irrationality by timing his moves in and out of the market. It makes sense. I don’t deny that. But it doesn’t work. Idiot Switching has a TERRIBLE track record. My guess is that Idiot Switching does even worse than Buy-and-Hold in the long run. Sometimes it works just by luck. But the historical record shows that it is a very, very bad strategy. One of the things that I love about the Buy-and-Holder is that they have done more than anyone else to EXPOSE the flaws of Idiot Switching.
Look at what happened in the late 1990s. Stock prices were at insanely high levels in 1996. We were priced for a crash. Idiot Switchers got out of stocks. Then we had three years of the biggest gains in history in 1997, 1998 and 1999. If you want to know how stock investing works in the real world, you need to take a moment to try to understand why that happened, why Idiot Switching was such a disaster in that particular case and in fact fails just about every time it is tried.
The Idiot Switchers are applying reason to an unreasonable situations. They are saying “prices SHOULD come down because they are now so high.” But the entire reason why prices got so high in the first place is that investors are not rational but highly EMOTIONAL Those darned emotional investors DON’T CARE that stocks are priced for a crash, they just go ahead and send them to higher and higher price levels anyway despite the logic behind the Idiot Switching “strategy.”
Valuation-Informed Indexing is not Idiot Switching. Not in any way, shape or form. Valuation-Informed Indexers are as much opposed to Idiot Switching as they are to Buy-and-Hold. Idiot Switching is at heart really just another emotional approach, another marketing gimmick.
Valuation-Informed Indexing is a risk management approach. The core idea is that investors should be trying to keep their risk profiles roughly constant over time. Risk increases as price increases. So for an investor to keep his risk profile constant, he MUST adjust his stock allocation in response to big price swings. Do that and you reduce the risk of stock investing by 70 percent while also increasing your returns enough to be able to retire many years earlier. It is impossible to imagine any scenario in which keeping your risk profile constant would not produce good results and of course the entire historical record shows that taking this simple step has been paying off big time for the investors who follow it for 145 years now. It is impossible for the rational human mind to imagine any circumstances in which it would not.
A showing that Idiot Switching does not work is old, old news, Anonymous. Those who follow the research in this field have known what this guy is saying for a long, long time. To check the merit of VII, you have to do what Wade Pfau and I did in the research that we co-authored and had published in a peer-reviewed journal. We checked the merit of VII. That is of course something very, very different from what this fellow did.
That’s of course why you threatened to destroy Wade’s career if he continued to do honest work while you did not threaten this fellow in any way. Idiot Switching offers no threat to Buy-and-Hold. Once the American people are able to learn about Valuation-Informed Indexing, which is the first true research-backed strategy, there will be no more Buy-and-Hold. We will all pull together to bury the smelly Get Rich Quick “strategy” 30 feet in the ground, where it can do no further harm to humans and other living things.
That’s Rob Bennett’s sincere take re these terribly important matters, in any event.
I naturally wish you the best of luck in all your future life endeavors.
Rob