An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on November 6.
I hope things have been going well with you since we last talked.
You noted in one of your e-mails from August that: “I’m moderating a panel session at the NAPFA Northeast Regional conference in Hershey, PA, this November – and the topic is entirely about safe withdrawal rates, and my panelists will be Bill Bengen and Jon Guyton (arguably THE two leading researchers on SWRs from the financial planning community). One of my goals for the session is to invite both of these individuals – who are both researchers and planning practitioners who work with clients – about how their views may have changed over the past 8 years of market history and in their work with clients. I’m very curious to see how the session goes!”
There’s an article today at Bloomberg.com revealing Bengen to be a recent convert to short-term market timing!
Juicy Excerpt: Bengen also is keeping his clients out of equities. Normally, he says, he believes in traditional asset allocation, but “this is one of those rare instances when duck-and-cover is appropriate.”
Yucko! This is not long-term market timing (which I very much advocate). This is short-term timing, the bad kind of market timing. Do you share my reaction? Do you believe, as Bengen now does (I cannot help wondering whether his belief in the merits of short-term timing is the result of a recent conversion caused by the price crash) that there are circumstances in which short-term timing can pay off?
It is of course not my intent to mock Bengen. As always, my intent is to point out the flaws of the Passive Investing model and of the Old School SWR methodology, which is the product of the Passive Investing mindset.
Have you seen the numerous articles in which people like Buffett and Bogle and Malkiel have been urging middle-class investors to hold their stocks or to buy more? The general point that they make is that, if you liked stocks when they were priced far higher than they are today, you should love them now. That’s of course true. But it ignores the emotional reality that Buffett and Bogle and Malkiel were not warning people of the dangers of going with high stock allocations at the prices that applied 12 months ago. People have been shocked by the size of the price drop because they were not warned of its inevitability by the “experts.” It is this shock that is the problem. It is this shock that has caused Bengen’s conversion to short-term market timing (in my view, of course).
Excessive emotion in one direction leads to excessive emotion in the other direction. Leading people to believe that there is no need to lower their stock allocations when prices are dangerous leads to people lowering their stock allocations TOO MUCH when prices drop to reasonable or sub-reasonable levels. Passive Investing does not work. That’s the bottom line.
Bengen is viewed as an “expert” in this field. So are Buffett, Bogle, and Malkiel. Yet he is doing precisely the opposite of what Buffett, Bogle and Malkiel are advising middle-class investors to do. What are middle-class investors to believe? If the “experts” cannot get their story straight, how are the middle-class investors to make sense of what they are saying?
The problem (in my view!) is that the “experts” continue to ignore or hush up the findings of the academic research of recent decades that shows that the Efficient Market Theory is nonsense. Humans are NOT rational actors. Humans are BOTH rational actors AND emotional actors. Changes in investor emotion are evidenced in changes in stock valuations. Valuations matter. Valuations affect long-term returns. It is not possible to calculate SWRs accurately without making an adjustment for the valuation level that applies at the start date of the retirement in question.
My view is that Bengen is wrong about short-term timing, but that Buffett (Buffett less so than the other two), Bogle and Malkiel are wrong about Passive Investing and that Bengen’s errors are largely the result of his too easy acceptance of the errors of these other “experts.” The bottom line? None of us can be true “experts” until the flaws of the Passive Investing model that were discovered decades ago are widely discussed by all who aspire to expertise in this field. We learn together by talking things over amongst ourselves and we cannot get to square one until we hear some straight talk from the big names in the field. We are all capable of better. We are all holding ourselves back by failing to work up the courage to bring the most important questions to the table.
I encourage you to ask Bengen about his conversion to short-term timing and about his dispute on this point with Buffett, Bogle and Malkiel. In the event that you do so, please let me know of his response. The purpose here is of course not to embarrass Bengen. It is to learn from him and to help him learn from us. The first step in the learning process is acknowledging mistakes of the past. The Old School SWR studies are analytically invalid and need to be corrected.
I hope that you will take these words in the spirit in which they are intended, Michael. I wrote them strong because I believe that the issues are important and that the financial damage that is being done by our failure to take effective action to let people know of what we have learned in recent years is causing more and more human misery as time goes on. Bengen’s conversion to short-term timing tells us something important about Passive Investing. It tells us that it does not work in the real world.