Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
Note that Michael states the following in the comments section:
“The “good” news is that this doesn’t really change SWR much, as the reality is that the SWR results all come from high-valuation environments in the first place.
Actually, the key distinction is that if you retire and valuations are NOT high, the SWR is more like 5%-6%, not 4%! See https://www.kitces.com/may-200… for my original research on this nearly a decade ago.
As such, it seems you missed Michael’s main point of his article. It is clear in the comments section and in this article that you don’t really see this as the point he was making. Notice that while you made a comment, Michael avoided responding to you while he responded to others.
Michael is wrong about this, Sammy. Shiller showed that valuations need to be considered. The SWR is not a single number but a number that changes with changes in the valuation level. Michael is of course correct when he says that the SWR rises to a number higher than 4 at times of low valuations. But he is of course wrong to say that the SWR does not drop to levels lower than 4 at times of high valuations. It works in both directions!
It’s not hard to figure out why Michael would be happy to point out that the number changes in one direction because of valuations but not in the other. That’s just good marketing! When you tell people that they can retire earlier than they thought they could, you make them happy. Happy people like you and people who like you link to you and hire you to give them advice and buy your books and all this sort of thing. When you tell people that it is going to take the longer to be able to retire than they thought, they do NOT like you. I tell people that side of the story too. That is anti-marketing! It hurts my popularity for me to tell people that. Big time. Most people in this field do not want to do harm to their popularity. So they don’t say that sort of thing.
That’s the story in a nutshell. Buy-and-Hold was a huge advance because the core idea was that we should use peer-reviewed research to guide our investing decisions. That takes things out of the realm of subjectivity and into the realm of objectivity. But we still have humans doing the calculations and reporting them. So there is still the risk of subjectivity entering the picture. The “idea” that valuations affect the result in only one direction is pure subjectivity. It’s a marketing trick. It works because people love hearing that they can retire early. They so much want to believe it that they are able to almost convince themselves.
But what do you think is going to happen following the next price crash? People are going to be angry that they have lost most of their life savings. That will change the marketing dynamic in a huge way. People will then demand honest calculations and Buy-and-Hold will be replaced with Valuation-Informed Indexing. The fantasy stuff that the Buy-and-Holders put out (in which valuations have an effect in one direction but not in the other) will not make the sale any longer.
Michael would be happy to tell people the truth about this if he had cover. He needs to see enough others telling the truth so that he would not stand out in telling people a message that they do not want to hear. We’re not there yet. But we are getting close.
Michael feels bad about this. He sees the merit in my points. He has told me so in our e-mail exchanges. But he does not feel comfortable going public with the side of the story that is anti-marketing. But he is obviously going to flip following the next price crash. For now, he doesn’t comment on my posts. But he doesn’t remove my posts either! He does permit people to see them. He goes a step past where a lot of others go by doing that. He’s not perfect. But I think it would be fair to say that he does a lot better than most in raising the points he does and in permitting people like me to leave fully honest comments at his blog.
My aim is to free Michael and lots of others to be fully honest on all investing questions. When that happens, we all benefit from 34 years worth of insights being produced in a small amount of time. There is huge leverage in getting enough people to feel comfortable posting in full honesty to create an environment in which all others also feel comfortable posting in full honesty. We all want the same things. The hard part now is creating that safe environment. People like Michael are helping to move the ball although I obviously would like to see him do more.