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 Michael sent to me on November 25:
Rob,
Thanks for the follow-up on this.
Just bear in mind that I don’t think you’re EVER going to see a “true” universal consensus on this issue, if only for the simple reason that many people invest so emotionally they WILL ALWAYS make terrible mistakes and do harm to themselves if you ever give them “permission” to not simply hold passively and strategically (or otherwise find a way for them to move active investment control out of their own hands). In other words, it is a reality that a large number of people will continue to do harm to themselves in investing as long as they do anything besides being passive and strategic, because THEIR version of active is counter-productive due to the emotional transactions that take place.
That’s not to say all of this conversation isn’t good, and that we shouldn’t try to move forward – but there IS a very real human reality to acknowledge here. You’d be shocked if you saw the kind of harm I’ve seen people do to themselves as a financial planner by the time they come to our firm, that all would have been avoided if they had simply been passive and strategic and taken their hands OFF their own portfolio. Obviously, I don’t believe that’s a universal prescription – in our firm itself we are active, tactical managers, who believe there’s significant benefit to incorporate valuation into evaluations of investments – but likewise that doesn’t mean that a personal implementation of valuation-driven investment risk management is necessarily going to be effective for everyone either.
As for the podcast title – I appreciate your efforts, although ironically I don’t think the new one is any improvement. 🙂 Now it just sounds like you’re taking a bigger dig at me – that you’re implying I’m not even an expert (by putting “expert” in quotes), AND that I just don’t get it. A reader without context would probably read it as the equivalent of “My conversations with Michael Kitces, showing that even a well-informed expert like him is just an “expert” who just doesn’t get it”. If these are supposed to be separate, you might clarify that for certain. Something like “My Conversations With Michael Kitces — Also, a look at how even the Best-Informed “Experts” Just Do Not Get It.” I know it’s long, but at least it makes the point that these are separate statements, and that the second isn’t supposed to be a negative reflection on the first. 🙂 In any event, thanks for your efforts to not make this sound like a slam against me. 🙂
With warm regards,
– Michael
John Walter Russell says
What was the final podcast title?
Have fun.
John Walter Russell
Rob says
It’s Podcast #34. To hear the podcast, people need to go to Page Five of the “Robcasts” section of the site.
The title ultimately was changed to “My Conversations with Michael Kitces” as a result of my consideration of concerns raised by Michael. There’s a little more discussion of those questions in e-mail correspondence with Michael that I will be posting at the blog in coming days.
Rob
John Walter Russell says
Thank you.
Michael has a point: some people will insist upon doing themselves harm regardless of what we might try to do to help them.
Have fun.
John Walter Russell
Rob says
Michael has a point: some people will insist upon doing themselves harm regardless of what we might try to do to help them.
I agree that it’s an important point. Jesus said that: “The poor will be with us always.” I see Passive Investing that way. The emotional investing strategies will be with us always no matter how hard we work to inform people of the realities and no matter how strong the case is that Passive can never work in the real world.
But—
There’s another side to the story. One of our most important findings of the first seven years is that people do not learn how to invest solely as the result of the workings of an intellectual process. We are not computers with legs. We learn by hearing what our friends say, what our neighbors say, what our co-workers say, what the “experts” say. People listen to other people. The way it is.
People have been saying for some time now that timing doesn’t work. What if that changes? What if Passive is on the way out and Rational is on the way in? Then we won’t be hearing over and over again in coming days that timing doesn’t work. Instead we will be hearing that timing is required for those who want to have some realistic hope of being able to finance a retirement for their old age. I think that can make all the difference.
There was a time when a lot of smart people thought that the academic studies showed that all forms of timing don’t work. For the past 30 years, the message has been the opposite — there is now a good bit of research showing that valuations do indeed affect long-term returns, just as our common sense tells us must be so. What if we permit discussion of the research findings of the past 30 years? Then you don’t have “experts” telling people to ignore their common sense at all costs but instead you have experts telling people to pay attention to their common sense. I think that could make a big difference.
It’s not enough for us to have a mountain of evidence that timing works. That doesn’t do the job with humans. We need to gain the ability to tell people this. And we need to engage in discussions about the realities of stock investing. People who have been misled by the Passive Investing enthusiasts need to hear the other side of the story, they need to be permitted to ask questions about what the data really says and about how it is that so many smart people got it all so terribly wrong.
Tell people a million times that timing is required instead of telling them that timing doesn’t work, and then — watch out! I think we’re going to see some big changes. I think Rob Arnott is right in saying that we are on the verge of a “revolution” in our understanding of how stock investing works in the real world. I think we are going to see a transition from the Passive/Emotional model to its opposite, the Rational/Long-Term Timing model.
The key is getting the people who know the realities to speak more clearly about what they know. People need to stop apologizing for recommending long-term timing. Long-term timing is the key to long-term success. But if you recommend it in an apologetic way, it will not click with people in a world in which people have heard thousands of times that timing doesn’t work. We need the people who have recommended Passive Investing to acknowledge that they got it wrong and we’re not going to see that happen until those who understand the realities become a bit more assertive in insisting that those who got it wrong acknowledge this (in as charitable a way as possible while still getting the job done, please!).
My take.
Rob