“Those…Investing in Equities [Hold] Securities Whose Future Earning Power Is Completely Unpredictable”

Tuesday’s blog entry set forth the text of an e-mail that I recently sent to Bill Bengen, a financial planner based in California who is a prominent Old School safe-withdrawal-rate researcher. Set forth below is Bill’s response, which was dated November 25, 2008:

Dear Rob:

I actually have been using in my practice results Michael Kitces published recently which relate withdrawal rates to the 10-year trailing S&P 500 index P/E. It filled a gap in my methods and makes a lot of sense. I always knew that starting valuations would affect initial withdrawal rates, but since 1994, when my first research was published, there was virtually no opportunity to utilize the concept, as the markets have been overvalued until very recently. Now, however, retirees will have the opportunity to employ much fuller withdrawal rates than was recently possible, possibly as high as 9% to 10%, depending on how severe a decline the stock market experiences.

I am not using market timing, as my decision to retreat to cash had little to do with any market indicators. Likewise, my re-entry to the market will not be conditioned on any indicators. I am totally unable to call market bottoms, so I don’t even try. I sold all client equities because I perceived an unusually high degree of risk in the economy and the financial system. I was unable to assess the degree of risk. If one can’t assess risk, one can’t manage it. I believe that those who are investing in equities now, or remain invested in them, are in possession of securities whose future earning power is completely unpredictable, owing to changes in American consumer behavior, and the effects of breakdowns in the credit and housing markets. We are entering a completely new world of finance, and I haven’t a clue yet where it will take us. I am waiting to attain a better understanding of likely outcomes before I dip my toe in the water again. I may miss quite a bit of a new bull market, but I missed 2/3 of the bear market (or more, possibly), so I can afford to be patient.

I will check out The Retirement Risk Evaluator when I get a chance. Thanks for bringing it to my attention.

Thanks for your kind words.

Bill Bengen