I have posted Entry #359 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Is the Year 2000 Retiree Safe Yet?
Juicy Excerpt: The usual rule that a retirement is safe if it does not experience a price crash within the first 10 years may not apply this time around. The annualized real return for stocks from January 2000 through December 2016 was 2.27 percent. A portfolio from which a 4 percent withdrawal was taken 18 times would be reduced to under $700,000.
That’s obviously not good. But in ordinary circumstances, this retirement would be highly likely to survive 30 years because the hit that it had to take as a result of the starting-point valuation level would be in the past. When stocks are priced at reasonable levels, returns are good enough to support withdrawals of a good bit more than 4 percent. So the lost ground could be made up over time.
But….
Stocks are priced today at two times fair value. The price we must pay for not having experienced a lasting price crash despite the high starting-point valuation level is that a lasting price crash remains unfinished business. There has never in the history of the US market been a secular bear market that ended before the P/E10 level dropped to 8 or lower. A drop to 8 would take the value of that $700,000 portfolio to something in the neighborhood of $200,000. A retiree who continued to take $40,000 withdrawals from a portfolio of $200,000 for another 12 years would be asking for trouble.
You were of course, saying all this, and predicting the same outcome, 4 or 5 years ago. The stock market doubled instead. I’m getting the funny feeling the market doesn’t consult the history books, or your blog, when deciding which way to move.
The retiree in 2000 had at least 50% bonds, and had made so much money from the 20 year bull market that preceded that year that a 2.27% real return was more than enough to live well on.
The history books tell the tale of how the stock market works in a way that our flawed human minds can’t understand on their own. If you studied the numbers, you would see that the important thing is not what year a crash comes but what it does to your accumulated life savings when it does come. You don’t need to know the precise year that a crash is coming to know that you don’t want to be fully invested in stocks when they rise to the price levels that inevitably bring one on.
Some 2000 retirees made enough in earlier times to live on and some didn’t. The problem is that the ones who didn’t make enough couldn’t figure that out using Greaney’s study because he got all the numbers wrong The price run-up from 1996 through 1999 led a lot of people who didn’t have enough to live on to believe that perhaps they did, and Greaney’s study encouraged them in that belief.
He should have corrected the study when he learned of the errors he made in it. A failed retirement is a serious life setback. That’s why we elected as a society to make financial fraud a felony punishable by prison.
I wish you all good things.
Rob
Uh huh. I found a similar pattern in winning lottery numbers a few years ago.
Funny thing though, when I made a big prediction based on the pattern I found, it didn’t come to pass. It was like the numbers moved randomly, without even consulting my study!
Despite your rantings, there has never been a 30 year period where a 4% withdrawal rate has not worked.
When your examination of the pattern that you believe helps in picking lottery winners is awarded a Nobel prize, I will put up a post about it here and let my readers decide for themselves whether it is something they want to make use of or not.
If you believe that Shiller should not have been awarded a Nobel prize for his work, you should make that case. You might be right. You might be helping people by making that case. You don’t make the case in an effective way by advancing death threats or demands for unjustified board bannings or thousands of acts of defamation or threats to get academic researchers fired from their jobs. Those sorts of acts are over the line. MAKE THE CASE for Buy-and-Hold and you are on the right side of the line.
One thing that I like about this comment is that there is a certain honesty lurking underneath its surface. Those who truly believe in Buy-and-Hold (and you Goons are True Believers, if nothing else!) really do see the idea that stock returns can be effectively predicted far in advance as pure mumbo jumbo. That follows from their belief that the market is efficient. If the market is efficient, valuations sure as heck cannot predict long-term returns! Shiller was engaging in silliness to even test such a proposition.
But here we are. He did test it. And the proposition passed with flying colors. It was Buy-and-Hold that was discredited. What to do, what to do?
We should be trying to figure out which belief system, the one that told us that the market is efficient, or the one that told us that valuations affect long-term returns, is right. To do that, we need to hold a debate. The Buy-and-Holders should be doing just what you do here — they should be pointing out the absurdity of Shiller’s findings, given their core belief that the market is efficient. They should try to be polite about it. They can show respect for Shiller’s accomplishments while pointing out the error that they believe he made, as I hope I always show respect for Bogle’s accomplishments while pointing out the error he made. But they should try as effectively as possible to make the point that Shiller must be wrong given their core beliefs.
Buy-and-Holders don’t do that today. They don’t talk about him much. They don’t see that he has much value given what his research says. But they generally do not engage with Shiller’s ideas. They sometimes acknowledge that there is a guy who was awarded a Nobel prize for showing that valuations affect long-term returns. But they patronize him. They acknowledge what his research shows and go right back to recommending strategies that don’t call for the exercise of price discipline when buying stocks as if Shiller’s research did not exist.
Peer-review committees comprised of Buy-and-Holders approve retirement studies that do not contain valuation adjustments. Huh? What the f? Peer-review committees are supposed to be familiar with the literature in a field. The members of a peer-review committee are required as part of their JOB to know that there is 36 years of peer-reviewed research showing that valuations affect long-term returns. The committee that examined the Trinity study should have rejected it on grounds that it contained no valuation adjustment, as required by years of peer-reviewed literature. But they didn’t do that. They approved the Trinity study despite its lack of a valuation adjustment. Which is what made Greaney believe that it would be “okay” if he too “forgot” to include a valuation adjustment in his study.
We cannot as a society continue to duck these questions. Either the market is efficient or it is not. Either valuations affect long-term returns or they do not. It cannot possibly be that both propositions are correct, the two propositions are in direct conflict. We are facing a national catastrophe in the event that it turns out that the proposition with 36 years of peer-reviewed research and a Nobel prize behind it is correct. In the event that Shiller is right, our entire society is in for a world of hurt in the event that the stock market continues in the future working anything at all as it always has in the past.
We should be as a society working hard every day to figure out which of the two Nobel-prize-approved propositions is correct. We should be debating these questions at every discussion board and blog on the internet. In a civil and reasoned way, in a way aimed not at bullying those holding other viewpoints into silence but aimed at gradually over time uncovering the truth re these matters.
This is my strongly held sincere viewpoint, in any event.
I naturally wish you the best of luck in all of your future life endeavors, John.
Rob
Despite your rantings, there has never been a 30 year period where a 4% withdrawal rate has not worked.
And I don’t want there ever to be one. So it is my intent to continue posting honestly re these matters and to continue encouraging others to post honestly themselves and to both tolerate and encourage honest posting by those holding other viewpoints.
Rob
“But here we are. He did test it. And the proposition passed with flying colors. It was Buy-and-Hold that was discredited. What to do, what to do?”
Shiller is heavily into stocks. He has warned repeatedly not to use PE10 for timing the market. In a recent interview, all he would say about PE10 is “well, I wouldn’t discard it.”
He told you what to do. You just won’t listen.
To save you time, I’ll type your standard deranged reply: “I love my country. What do you want from me? Stop asking me to commit felonies. Stop the death threats. You’re going to prison.”
If you wanted to know what Shiller truly believes, you would drop all the abusive stuff and invite Shiller and all people who agree with Shiller’s idea to participate in fruitful discussions with Buy-and-Holders. Over time, people on both “sides” would learn more and more and more and live richer and ricer and richer (in every sense of the word) lives.
Taking a few words that Shiller said out of context and then insisting that only the gooniest of Goons could possibly interpret his words properly just doesn’t cut it. Shiller doesn’t believe what Bogle believes. If he did, he wouldn’t have described his 1981 findings as “revolutionary” in their implications. Nor would be have been awarded a Nobel prize for his work.
By the way, I love my country. And I would like to know what it is that you want from me. And I truly wish that you would stop engaging in intimidation tactics aimed at pressuring me to commit felonies (financial fraud is a felony and I do NOT believe that the retirement study posted at John Greaney’s web site contains a valuation adjustment — thousands of people have looked at it and not one has been able to identify a valuations adjustment in it). I would be truly grateful if you would knock it off with the death threats and all the other smelly abusive stuff that you have advanced during the first 15 years of our “discussions.” And, yes, I do believe that the odds are that you will be going to prison in the days following the next price crash but I still intend to do all that is in my power to get your prison sentence reduced to the extent possible given the realities that apply re this terribly important matter.
And, yes, I once again wish you all the best that life has to offer a person despite our differences re how the stock market works in the real world.
My best wishes.
Rob
What did the previous poster do that you say is abusive? You keep talking about abusive behavior, yet I never seen any proof supporting your claim. Same goes for the death threats.
He mischaracterized Shiller’s views.
A fair-minded person would acknowledge that Shiller’s views re how stock investing works are OBVIOUSLY very, very different from Bogle’s views re how stock investing works and would encourage those holding either set of views to post honestly re their views at every investing discussion board and blog on the internet.
The Buy-and-Holders are not the first humans who ever walked the earth who possess perfect knowledge. They are capable of making mistakes, just like all the rest of us. The way that they learn about those mistakes is by hearing those who hold different viewpoints discuss their ideas in civil and reasoned discussions.
Anyone who supports or tolerates a Ban on Honest Posting re the last 36 years of peer-reviewed research in this field is behaving in an insanely dogmatic manner, Anonymous. Only in the most extreme cases will there be prison terms following from their behavior. But I think it would be fair to say that even those who merely TOLERATE a Ban on Honest Posting at boards at which they participate are guilty of at least a measure of dogmatism and the abusiveness inherent in it.
I myself was once guilty of that measure of dogmatism and abusiveness. I knew about the errors in Greaney’s study when I first posted to the Motley Fool board in May of 1999. I didn’t work up the courage to point out those errors until May of 2002. I was guilty in a small way of the abusiveness of which I am accusing others for those three years. My failure to speak up undoubtedly made others who felt to some extent inclined to speak up reluctant to do so. My actions brought out the worst in my fellow community members where honest and brave behavior on my part would have brought out their best. I am not proud of my cowardice during those three years of posting. I am ashamed of it. But I am happy that my awareness of my cowardice has helped me develop a better appreciation of the pressures that have caused millions of others to engage in similar acts of cowardice and of the rationalizations (some reasonably strong, some painfully weak) that they use to tell themselves that what they are doing is “okay.”
This sort of thing is not okay. The more widely practiced it is, the less okay it is. Because the more widely practiced it is, the more harm we do ourselves as a society. I love my country. So I make a sincere effort today to always take push things in a more positive and constructive and life-affirming direction.
My best wishes to you.
Rob
“He mischaracterized Shiller’s views.”
You have got to be joking. He is directly quoting Shiller as well as showing exactly what Shiller is doing with his investments.
On the other hand, we see that you have constantly mischaracterized what Shiller has said and then you respond by saying that he really hasn’t said those things because he is scared.
Secondly, you describe banning as abusive, yet that is what you do every day.
Talk about hypocrisy.
“If you believe that Shiller should not have been awarded a Nobel prize for his work, you should make that case. ”
Shiller’s work showed that in times of high valuations, ex post stock returns should be lower, on average, than during high valuations. Just like in times of low interest rates, bond returns will be lower than in times of high rates. In other news, water is wet, and the sun is hot.
How you morphed that into “the stock market is going to drop 60% in the next 3 years” is beyond me.
You have got to be joking.
We obviously do not agree on a number of points, Anonymous.
The root of it all is that you believe that the market is efficient while I believe that valuations affect long-term returns.
I believe that we will as a society engage in serious efforts to talk through these differences because the consequences of having failed to do so for 36 years will at that time be clear to all of us.
It will be interesting to see how things play out, my old friend.
Rob
How you morphed that into “the stock market is going to drop 60% in the next 3 years” is beyond me.
It’s not beyond you at all. For emotional reasons you don’t want to accept the clear implication of Shiller’s finding and so you block it out. But it is not beyond your intellectual abilities to grasp it if you ever overcome the emotional defensiveness.
Shiller showed that valuations affect long-term returns. The market always returns to fair-value prices in time. There has never been one exception in the historical record. So we know when prices are at two times fair value, prices are going to be falling by 50 percent in days to come. We don’t know how long it will take for that to happen. But we can look at the historical record and identify the longest period of time that we have ever seen before we saw the return to fair-value prices. That is 10 years. Count 10 years from mid-2009, when prices first reached dangerously high levels, and you get to mid-2019. Count forward from today and you get a finding that “It will take one or two or perhaps three years” for prices to crash.
There’s nothing even a tiny bit intellectually complicated about it. It’s EMOTIONALLY complicated in the extreme. If Shiller is right, every investor needs to divide the number on his portfolio statement by two to identify the true, lasting value of his portfolio and to engage in effective financial planning. The emotional complications that follow from that are too numerous to count.
I think that we made a terrible mistake as a society when we failed to start dealing with those emotional complications back in 1981, when we first learned of the need to do so. Everything is in a big tangle today. Shiller’s findings were wonderful news. The peer-reviewed research that I co-authored with Wade Pfau shows that, by permitting honest discussion of the past 36 years of peer-reviewed research in this field, we can reduce the risk of stock investing by 70 percent. That’s an amazing advance! But we have tangled things by dragging our feet for 36 years on the launching of the debate that we need to have for every investor to tap into the benefits of the amazing advance and to have their questions answered and so forth.
My sincere take.
Rob
“We obviously do not agree on a number of points, Anonymous.
The root of it all is that you believe that the market is efficient while I believe that valuations affect long-term returns.
I believe that we will as a society engage in serious efforts to talk through these differences because the consequences of having failed to do so for 36 years will at that time be clear to all of us.”
You didn’t even address the points raised. Your description of abusive posts are what you have been doing, yet you blame others.
Okay, Anonymous.
Please take good care, my long-time Buy-and-Hold friend.
Rob
If I am reading this right, we have an anonymous poster that quotes what Shiller says and describes his Shiller invests, but you call that abusive posting, because you think Shiller is either lying or not telling the truth because he is afraid. So the only way you would see that person as not being abusive is if he agrees with your position on what you think Shiller “Should” say. Have I got that right?
Secondly, you think someone is abusive if they block your posts because you think your comments are valid,yet you think that if someone else’s comments are not valid, you should be able to blame block them and not be given the same label of being abusive. Have I got that right as well?
The way you say it isn’t exactly right. You’re twisting things to serve your purposes, as you always do. You take statements out of context, that sort of thing.
All that said, there is a point mixed in with all your deceptive garbage that is real and important.
Why is it that the entire world does not know with something close to a perfect understanding what Shiller thinks on all these questions? I say what I believe on all sorts of issues all the time and I say that every point I make is rooted in Shiller’s 1981 finding that valuations affect long-term returns. You are not being unreasonable to ask: “What does Shiller think of what Rob says?” It’s a perfectly logical question. Shiller published his research 36 years ago. We should know by now what he thinks on just about every question that follows from the publication of that research.
But we don’t.
The reality is that we just don’t.
The first question that came up in our discussions is the question of whether one needs to include a valuations adjustment in a safe withdrawal rate study to get the numbers right. Pretty darn basic, right? The primary purpose of investing is to finance one’s retirement So we all should be pretty darn concerned that we get that one right. Okay. John Greaney says that you don’t have to include a valuations adjustment. Mel Linduaer obviously thinks the same. Jack Bogle too. Rob Bennett obviously thinks otherwise. How about Shiller? Does Shiller agree with Rob Bennett? Or with Jack Bogle?
It would help to know, would it not? It would be a lot harder for you Goons to terrorize our board and blog communities if Shiller came out with a clear statement that he endorses Rob Bennett’s views on this matter. I think that would great. I think he should do it. I think that, when Shiller does that, we will be able to put the nasty side of this matter behind us and have a healthy and productive and fun debate from that point forward. Shiller hasn’t done it. Why? It would take all of ten minutes of his time to write a brief statement saying “Rob Bennett is right re safe withdrawal rates, in my view” and get it posted at some big investing site. The question of whether the retirement studies used by millions of middle-class Americans to plan their retirements got the numbers wrong or not is obviously an important one. So why haven’t we seen that statement (or a statement saying the opposite if Shiller agrees with you Goons — a statement saying that this Rob Bennett fellow is off his nut re the safe withdrawal rate matter)?
And why haven’t you Goons DEMANDED such a statement from Shiller? You have gone to enormous trouble to keep people from being able to discuss the errors in the Buy-and-Hold retirement studies. If you truly believed that there were no errors, you would just go to Shiller and ask kindly for a statement to settle the matter. If for some reason he did not respond, you would ask Bogle to serve as a go-between and get the statement you need to settle this matter that way. This is an obvious solution to the problem that has been available to you going back to Day One and you have never sought it. Huh?
You don’t want a statement. You know what the statement would say. You don’t want a statement.
We have known intellectually how stock investing works for 36 years now. Most of us emotionally cannot accept what we know intellectually. So we keep out mouths shut and we encourage all others to keep their mouths shut too and we punish the Rob Bennetts of the world who just can’t catch a clue as to what behavior is tolerated on investing boards and what behavior is not tolerated.
Shiller tells the truth. He was awarded a Nobel prize for doing so. But he would prefer not to get banned from every site on the internet. So he pulls his punches. He is not going to give you a dishonest statement if you ask for it. But he is not going to offer a completely honest statement either until he feels that the time is right, until he feels that the price that he will be made to pay for his honesty will not be too great. I think it would be fair to say that that time will come sometime following the next price crash.
I don’t want to wait until then to start posting honestly re matters that every investor alive on the planet needs to know about TODAY. That’s the difference between me and Shiller. I am an inpatient sort of fellow.
Shiller honors the Social Taboo against speaking honestly about how stock investing works while bubble prices remain in effect. I violate that Taboo every day. I believe that that Taboo is killing us as a society and so I violate it daily in hopes that others will come to see the need to violate it as well and we will all move together to a far better place in our understanding of how stock investing works than we inhabit today.
I hope that helps a small bit, my long-time Taboo-following friend.
Rob
“And why haven’t you Goons DEMANDED such a statement from Shiller?”
Lots of reasons.
1. Shiller has no idea who you are.
2. If he did know who you are, he would say you’re a nut.
3. When he called you a nut, you would just say he’s being intimidated. Only difference would be the rush you got from him acknowledging your existence. You’d probably send out 30,000 emails bragging about that.
4. Nothing Shiller could possibly say would change my mind about how to invest anyway.
5. Civilized people don’t DEMAND statements from other people.
1. Shiller knows what safe withdrawal rates are and Shiller knows what valuations are. That’s what matters.
2) I don’t think Shiller would say that I am a nut. Wade Pfau sure didn’t say that. He researched the issue for a long time and came to the conclusion that “Yes, Virginia, Valuation-Informed Indexing works!” Rob Arnott sure didn’t say that I am a nut. He said that my site is right on. He said that he has seen the same intimidation tactics that I have run into and that he finds them deplorable. Bill Shultheis sure didn’t say that I am a nut. He said that he found my site amazing, that he had never seen a site that offered so much great information in one place. Michael Kitces sure didn’t say that I am a nut. We exchanged scores of e-mails and he made clear that he enjoyed the interactions and learned a lot from them. I think that, if you Goons thought that there was anything more than a zero chance that Shiller would say that I was a nut, you would have asked for his comments re these matters a long, long time ago. I mean, come on.
3) If Shiller said that I was a nut, I would report on that here at the blog. If he gave reasons why he thought that, I would explore those. If I found some of his reasoning weak, I would point that out. But I would certainly report what he said. What Shiller says re these matters is news.
4) “Nothing Shiller could possibly say would change my mind about how to invest anyway.” — Um….
5) I think it would be reasonable to demand a statement in this case. There are millions of middle-class retirements at risk. If it really is so that the Buy-and-Hold retirement studies do not contain valuation adjustments, we are going to experience the biggest social catastrophe in U.S. history. There were thousands upon thousands of newspaper articles and web site articles that offered retirement planning advice rooted in the infamous “4 percent rule.” Millions of retirees relied on that Buy-and-Hold retirement advice to their detriment. These people did nothing wrong. They tried to do the responsible thing by checking out what the experts said. They of course had no way of knowing that there were people who knew that the studies were in error but feared saying anything because of what they knew you Goons would do to them if they offered honest comments. If Shiller can do something to help get those studies corrected 15 years after the errors in them became public knowledge, it sure seems to me that he should be doing it.
If you want to just ask rather than to demand, then please ask. You haven’t done that much for 15 years now.
I wonder why.
Rob
Uh huh. None of those names you just dropped will correspond with you. Not a one. Some of them used to. But not anymore. Why do you think that is? Before your knee jerk reaction (Goon intimidation) I’ll tell you the real reason:
“we are going to experience the biggest social catastrophe in U.S. history.”
You believe you personally have it within your power to affect that outcome. Which makes you a nut.
“Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”
— Margaret Mead
Rob
Before you DEMAND a statement, here it is: By “thoughtful, committed citizens” I didn’t mean a lone nut who spends all his time tapping at a keyboard.
That one nut has collected the contributions of THOUSANDS who would like to see every site on the internet opened to honest posting and archived them for easy viewing in the days following the next price crash, Margaret.
I’m not the first thoughtful, concerned citizen who was called a nut in the days before the tide turned. Rosa Parks was called a nut before the tides turned. Rose McGowan was called a nut before the tides turned. Jack Bogle was called a nut before the tides turned.
It will be interesting to see how this thing plays out.
Rob