I’ve posted Entry #378 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stocks Have Been Performing Poorly for a Long Time — That’s Good News!
Juicy Excerpt: I don’t think it is fair to cite the price-only return. Stocks pay dividends. So dividends should be included in assessments of how well the stock market has been performing. Count dividends and the real return so far for this Century is 2.9 percent. That number is not quite so shocking. But it is certainly not good. As Hulbert observes, most investors would guess that stocks have been doing much better for the past 18 years. Why the confusion? How is it that so many of us have been so misled about the long-term performance of the asset class on which our hopes for our financial futures are riding?
Stock performance is a big deal. When millions of people experience sub-par stock returns for many years running, they spend less on all consumer goods and services. The effect on the economy is substantial. But Hulbert is right — most investors are not even aware that stocks have been doing this poorly for this long. People notice when automobile manufacturers are no longer offer strong value propositions, or when companies producing smart phones are no longer getting the job done. But poor stock performance goes unnoted. Why?
The reason for the bad performance of stocks that Hulbert references in the article is because he chose a market peak as his starting point. As he said “But try telling that to the investor who was unlucky enough to invest a lump sum in the stock market in March 2000”.
But for the vast majority of investors that is mostly irrelevant.
I too invested in March 2000 with the S&P500 over 1500 and achieved the subsequent mediocre results.
But I also invested in October 1998 with the S&P500 below 1000 and the received mush better results
September 2002 at 800 and and October 2007 at 1500 (good and bad)
February 2009 at 735 and February 2015 at 2100 (again good and bad)
It was over 2800 in January and the current decline may be a blip or the start of a 50% correction.
I have actually benefited from all this market volatility. Through making regular purchases (about twice a month for almost all this period) I have been buying more shares when prices are low that I do when prices are high.
Also, because of re-balancing I sell shares as they rise and buy back in again when they fall.
Basing an article on the poor returns achieved from a market peak is just as misleading as basing an article on the great results achieved from a market low.
I like your comment, Evidence. It’s balanced.
There’s obviously something that we do not agree on. You don’t highlight our differences in the comment. And that’s fine. We don’t always need to be talking about our differences. From time to time, it’s helpful to note our common ground, which is considerable.
Most investors do not invest lump sums. The normal thing is that they invest during highs and during lows and during in-betweens and it all sort of balances out. I get that. I get that that’s a big reason for the appeal of Buy-and-Hold to millions of people.
I don’t have a problem with people making that point. It’s a legitimate point and it needs to be made. So that’s not an issue.
But I have a problem when Buy-and-Holders don’t want to hear the other point being made. The other point is that the value proposition of stocks is not constant; it changes with changes in valuations. I think that there are times when it is important that that point be made. I think that’s where we part company. It is my experience that it is when I make that point that frictions begin to evidence themselves.
I made that point in response to a comment from you a few days ago. I noted that an investor who calculated that he needed $60,000 to live on in retirement was nowhere close to being able to retire if he had a stock portfolio of $700,000 in January 1996. He was $800,000 short of what he needed for a safe retirement, according to the Greaney study and the other Buy-and-Hold studies. But by January 2000 he was good to go because stock prices increased by over 125 percent in those four years. If you adjust for valuations, he was still nowhere close to where he needed to be. If you do not adjust, he was “100 percent safe,” in Greaney’s words.
This is our point of disagreement. I don’t think that that fellow would be entering a safe retirement if he took a 4 percent withdrawal starting in January 2000. I think he would have been kidding himself. And I think that any adviser who told him that a 4 percent withdrawal was safe would be hurting him in a very serious way.
And it is not just retirements that are at issue here. People need to know the true, lasting value of their portfolios for all sorts of financial planning purposes. And most just do not know the correct numbers today. Most people view their portfolio statement numbers as reasonable approximations of the truth. Shiller’s research shows that they are not that. If valuations affect long-term returns, people need to divide today’s portfolio numbers by two to know their real portfolio values. That’s a big deal.
That’s the dispute. I don’t have a problem with people saying “look, most of us don’t invest lump sums, so the returns earned from the 2000 high are not completely relevant for all of us.” That’s a reasonable point to make. But we also need to be telling people “look, don’t count today’s portfolio numbers as real, having $500,000 in your portfolio when valuations are where they are today is nothing like having $500,000 in your portfolio at a time when stocks are selling at fair prices, it’s nothing even close to being the same.”
I want to help people get the numbers right so that they can engage in effective financial planning. That’s what this all comes down to. I don’t say that there aren’t different ways to look at things. Stocks are a great asset class and it is true that most people invest over a range of valuation levels and that thus the bad side of high valuations doesn’t hit them with full force when their entire investing experience is taken into consideration. But people do need to know that price increases have a negative side to them. That point is not made often enough, in my assessment. I think that we all need to be making that point more frequently and more effectively.
We don’t disagree too much (or perhaps not at all!) on the particular point that you made with this particular comment. But it is my strong sense that we still disagree on this other, broader point, and I think that that disagreement is no small thing, the dispute is over an important aspect of the stock investing experience.
I hope that all of that makes at least a small bit of sense to you.
Thanks for stopping by.
Rob
“I don’t think that that fellow would be entering a safe retirement if he took a 4 percent withdrawal starting in January 2000.”
You don’t think. In other words, your opinion. Based on nothing but gut feel. Bill Bengen says year 2000 retirees are doing just fine with 4.5%. And he has the numbers to back it up.
The “dispute” is that you believe your gut feel opinion trumps the actual numbers of the acknowledged giant in this area of study. And that you think other people should also believe that.
Wade Pfau is a giant in the field of retirement planning. He was asked at his Reddit appearance whether he agreed that the safe withdrawal rate is always 4 percent. He said that that he does not believe that a 4 percent withdrawal is safe for a retirement beginning at today’s valuations.
I am not going by gut feel. I am going by 37 years of peer-reviewed research. If valuations affect long-term returns, then there is zero chance that the safe withdrawal rate is the same number at all valuation levels. It is a logical impossibility. Bill Bengen should be addressing that logical impossibility in his public statements. So should everyone else who works in this field. We need to launch a national debate on these sorts of questions. They affect every single person alive on the planet today (including non-investors).
Shiller has been awarded a Nobel prize. He is as much of a “giant” as you are ever going to get. Have you asked Shiller whether he believes that the safe withdrawal rate is the same at all valuation levels? Has Bengen asked him? Has Bogle asked him? If not, why not?
If I had attended that Bogleheads annual meeting, I would have asked Bogle whether he thought that high valuations can push the safe withdrawal rate below 4 percent. Did you ask that I be permitted to attend so that we all could hear Bogle’s response?
Bill Bernstein said in his book that, when valuations are as high as they were early in the 2000s, you need to subtract two points from the usual 4 percent to know the safe withdrawal rate for retirements beginning at that time. Is Bernstein a giant?
The safe withdrawal rate is the product of a mathematical calculation. There shouldn’t be all these different answers to the most basic of questions. The reason why there are different answers is that there are today two very different schools of academic thought as to how stock investing works. Buy-and-Hold is rooted in Fama’s research and Valuation-Informed Indexing is rooted in Shiller’s research and the two pieces of research say opposite things about how the stock market works. Fama says that the market is efficient. If that were so, the safe withdrawal rate would always be the same number. Shiller says that it is investor emotion that sets stock prices. If that is so, then the safe withdrawal rate varies according to how much emotion is present in the market price at any given point in time.
The differences in opinion are differences in fundamental starting-point premises. These differences cannot be resolved without extensive debate involving the participation of thousands of people from both points of view, ALL POSTING THEIR SINCERE THOUGHTS WITHOUT FEAR OF WHAT WILL BE DONE TO THEM AS THEIR “PUNISHMENT” FOR ADDRESSING THESE MATTERS SINCERELY AND THOUGHTFULLY. We have good ways of resolving these sorts of differences of opinion in this country. We need to let our system of justice work its magic. We need to begin enforcing our laws against financial fraud in a reasonable way.
These are my sincere thoughts re this terribly important matter in any event, my long-time Buy-and-Hold friend.
Rob