“Shiller Says That It Is Investor Emotion That Sets Stock Prices.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“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