Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Scott Burns discusses SWR including the affect of valuations
Whadda ya think?
I think Scott believes what he says in that article, Trebor.
I also think that Scott is wrong.
Scott accepts that valuations affect long-term returns. But he is not able to let in HOW BIG a factor the valuations factor is. So he RATIONALIZES until he has come up with some positions that do not undermine his belief in the core Buy-and-Hold realities that he does not want to give up.
He points out that many do not believe that 4 percent will work today. He also points out that SWRs well below 4 percent are “too low.” He says that withdrawal rates above 6 percent are dangerous. Where does he come up with this stuff? Where is the research/data behind this jumble of sincere (but seriously jumbled) beliefs.
There is no research supporting the jumble of confusion put forward in this column.
There once really WAS research-based support for the Old School SWR findings. Those findings were wrong. But at least they were LOGICAL. That gives them an edge over what Scott Burns is putting forward in this article. If the market is efficient (there were once a large number of smart people who believed this), 4 percent really is the SWR. If the market is efficient, risk is stable and the SWR is always 4 percent. The Old School studies advanced our understanding of how stock investing works in a way that the jumble of confusion posted by Scott Burns does not.
If valuations affect long-term returns, then risk VARIES with changes in valuations, and the SWR sometimes drops as low as 1.6 percent (in the year 200) and sometimes rises as high as 9 percent (in 1982).
What people have a hard time accepting is how big a gulf there is between the strategic recommendations of Buy-and-Hold (rooted in a belief in the efficient market) and Valuation-Informed Indexing (rooted in a belief in Shiller’s research showing that valuations affect long-term returns). I understand why big change makes people skeptical. But the big gulf is not my doing. It is a result of the fact that the effect of valuations is huge and that this is the factor that the Buy-and-Holders happened to miss when they were putting together their models (in the days before Shiller published his research).
The bottom line here is that I think that Scott is sincere but that his thinking is hopelessly muddled and dangerous.
I am grateful to you for asking an intelligent question, Trebor.