William Bengen is a financial planner based in El Cajon, California. He is well known for his work as one of the early researchers using the Old School safe-withdrawal-rate (SWR) methodology for retirement-planning research. Set forth below is the text of an e-mail that I sent to Bill on November 24, 2008:
Mr. Bengen:
My name is Rob Bennett. It’s possible that Michael Kitces mentioned my name when you had dinner with him recently at the SWR conference in Hershey, PA. I am a journalist who has engaged in extensive study of problems with the Old School safe-withdrawal rate (SWR) studies and who now advocates a move to the New School approach (an approach in which SWRs are adjusted for the valuation level that applies on the day the retirement begins). I have engaged in a good bit of e-mail correspondence with Michael re SWRs and related topics. Your name came up in a recent e-mail and I thought that it might be a good idea to run my questions by you.
Here is a link to a New School calculator (“The Retirement Risk Evaluator”) that I co-developed with John Walter Russell (please note the articles linked to at the bottom of the page):
Link to Retirement Risk Evaluator
Here is a link to John’s site (John did the research that is the engine for the calculator and published it at his site):
I of course have great respect for the work you have done in this field. I share William Bernstein’s view that the Old School SWR studies represented “breakthrough research” in their day.
That said, I do not believe that it is possible to calculate the SWR accurately without making an adjustment for the valuation level that applies on the day the retirement commences. My sense is that it was a belief in the Efficient Market Theory and in the Passive Investing model for understanding how stock investing works that flowed from it that is responsible for the failure of the Old School studies to include a valuations adjustment. The academic-research evidence showing that valuations affect long-term returns (and, thus, SWRs) has grown stronger and stronger in recent years. I believe that we need to incorporate these findings into all retirement planning analyses. The alternative (assuming that it really is so that valuations affect long-term returns) is to see millions of failed retirements resulting from the fact that people are planning their retirements without taking valuations into account.
I saw the article at Bloomberg.com stating that: “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.’ ”
Is this accurate? It sounds as though you are advocating short-term timing. I’d be grateful for any expansion on those comments that you care to put forward that would help the readers of my blog understand better your views as to when short-term timing is appropriate and whether you believe that reliance on short-term timing undercuts the theory behind the use of SWR studies (the common view is that these analyses work only for those who maintain their initial stock allocations at times of big price drops).
My personal view is that short-term timing does not work but that long-term timing does work (long-term timing is a policy of lowering one’s stock allocation at times of extremely high prices with an understanding that benefits may not be seen for doing so for as long as 10 years). I’d also be interested in hearing (and reporting to my readers) any reactions you have to The Retirement Risk Evaluator, which implicitly supports the long-term timing concept (by showing how much higher the SWR is at times of low or moderate prices).
Thanks for the groundbreaking work you have done in the SWR field and for any thoughts that you are able to offer in response to these questions.
Rob
JCL says
Rob Wrote:
My personal view is that short-term timing does not work but that long-term timing does work (long-term timing is a policy of lowering one’s stock allocation at times of extremely high prices with an understanding that benefits may not be seen for doing so for as long as 10 years
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Does your method call for greatly increasing one’s stock allocation during low valuation periods?
Rob says
There is no one “method” that I recommend, JCL. I advocate Rational Investing, which is the opposite of Passive Investing. I say that we should buy stocks heavily when the long-term value proposition is strong and not so heavily when the long-term value proposition is poor. (Passive Investing posits that there is no need to take the long-term value proposition into account, that it is okay or even a good idea to stick to the same stock allocation regardless of whether valuations are high or low.)
You can check out The Stock-Return Predictor to assess the long-term value proposition of stocks at different valuation levels. The calculator shows that the long-term value proposition is very strong indeed when valuations are low. So, yes, as a general rule, the Rational Investor is going to go with a high stock allocation when prices are low. You of course need to take your personal circumstances into account and make whatever adjustments are needed as a result of doing so.
Rob
bengenfan says
Did he reply?
bengenfan says
Has Kitces corresponded lately?
Rob says
Did he reply?
Yes. I expect to post Bill’s response as Thursday’s blog entry.
Rob
Rob says
Has Kitces corresponded lately?
Michael sent me an e-mail a week ago or so that I have not yet had a chance to post. It’s possible that I will put that forward next week. It’s also possible that I might elect to hold off on it for at least one more week (there are a few others items that I am trying to fit in before they get too dated).
Rob