So said “imfelbi” in a post to the Motley Fool board in the very earliest days of The Great Safe Withdrawal Rate Debate. One of our Numbers Guys had done a sensitivity study showing that the results of the conventional-methodology studies are highly unreliable. Imfelbi argued that: “I would rather work a few more years than cut it so close.”
Today, imfelbi has another choice. Today, we know how to calculate safe withdrawal rates accurately. That’s part of the message that we want to get out through the “Save the Retirements!” initiative too.
Here is a list of ten important insights that we developed in the first 45 months of our discussions:
1) Timing Doesn’t Work. You no doubt already know this. But do you know why timing doesn’t work? Many people believe that the reason why timing doesn’t work is that stock returns are unpredictable. Not so. Stock returns are highly predictable. So why does timing not work? Because it takes years for the laws of probability to assert themselves. Just as it is possible for the house to lose money to a gambler who pulls a slot-machine lever only ten times, it is possible for overvalued stocks to go even higher (or for undervalued stocks to go even lower) over the course of one or two or three years. In the long run, though, valuations matter big time.
2) Timing Works. In confirming the finding that short-term timing doesn’t work and determining why that is so by studying the historical stock-return data, we learned something far more important — go out far enough for the laws of probability to assert themselves and timing does work. So you can’t know in advance how stocks are going to do in the next one or two or three years. Who cares? We are long-term buy-and-hold investors. We want to know how stocks are going to do in 10 or 20 or 30 or 40 years. Within a reasonable margin of error, we can.
3) Stocks Are Safer Than Most People Think. Most investors do not know that long-term timing works. That means that most investors are taking a gamble with their money when they invest in stocks. There’s no need to gamble. So long as you are a long-term investor and so long as you invest in index funds, you can have a darn good sense on the day you make the investment of what sort of long-term return you are going to obtain. That’s cool.
4) Stocks Are More Risky Than Most People Think. The other side of the story is that there are times when the long-term returns likely to be obtained by purchasing an index fund are not so hot. Stocks are generally less risky than most people think. But at times like today, stocks are more risky than most people think.
5) Stocks Are Like Cheerios. It turns out that stocks are like just about any other asset you can purchase. Those of us seeking financial freedom early in life know that the key is making good use of our money. We buy cars just like everybody else, but we aim to obtain a strong value proposition when we do. We buy houses just like everybody else, but we aim to obtain a strong value proposition when we do. Now we know to apply the same logic to our stock purchases.
6) It’s All About Income Streams. Much of what you hear about stocks in the general media is noise. Experts go on and on about all sorts of issues, but the end result often is to leave you more confused about what to do with your money than you were when you started. Our safe withdrawal rate research has taught us to focus on income streams. The purpose of investing is to provide you an income that you can live on separate from the income you earn from the work you do. Focus on income streams, and you can make sense of the investing project.
7) Cash Is A Strategic Asset Class. Lots of people make fun of those who invest in things like ibonds and TIPS. Not us aspiring early retirees. We know that putting some of our money in cash when stock prices are high permits us to buy more stocks when prices are better. Putting cash to strategic use allows us to win financial freedom years or even decades sooner than would otherwise be possible.
8 ) The Biggest Risks Are Emotional In Nature. You often hear experts say that, to obtain a strong return from your investments, you need to be willing to take on risk. Yes and no. You do need to be willing to take on some risk. But the biggest investing rewards go to those able to gain sufficient control over their emotions not to overreact when stock prices get too high (by buying too much stock) or when stock prices get too low (by selling too much stock). Use our findings from the historical data to rein in your emotions, and you can enjoy better long-term returns than those who take on far more risk (by buying lots of stock when prices are high).
9) Stocks Really Do (and Do Not) Provide a Real Long-Term Return of 6.8 Percent. Many stock investors take comfort in claims that stocks provide a long-term real return of 6.8 percent. That’s so. For stocks purchased at times of high valuation, however, it can take a long time to get to that 6.8 percent return. If you only expect to be alive for another 30 or 40 years, it may not happen in your lifetime. The historical data can give you an idea of how long it is going to take to attain whatever return you are seeking from stocks. That’s a big help for those putting together plans to live off the income streams generated by their investments.
10) Dividends Matter. When retirements fail, it is usually because the retiree had to sell stocks when prices were down to cover his living expenses. Stocks that pay good dividends provide a regular income stream that gets you through the down times without having to sell shares. Dividend-paying stocks are a different sort of investment class than non-dividend-paying stocks, one that allows investors to enjoy the good side of stocks while avoiding much of the bad side.
Let’s get about the business of taking our exciting findings of recent years to the Big Bad World outside of the friendly confines of the Financial Freedom Community discussion boards.
Save the Retirements!
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