“The Most Significant Idea That Wade Pfau Puts Forward in the Article Is the Idea That Valuation-Informed Indexing Worked From 1870 Until 1996 and Then Stopped Working. I Don’t Buy It. You Have to Ask — Why?”

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

Not sure if you have seen this

Wade Pfau: The 4% Rule Is No Longer Safe

Episode Summary
The noted retirement researcher discusses how pre-retirees and retirees can adjust their plans in times of market stress.

https://the-long-view.simplecast.com/episodes/wade-pfau-9Z7_8m/transcript

Thanks much for providing that link, Evidence.

Wade makes about 20 points in that article that merit discussion. I will write a column for Value Walk looking at some of them.

I am certainly glad that Wade is saying that the 4 percent rule doesn’t work. I am proud to be able to say that he learned that from me. I don’t get the sense that our views today on these issues are precisely the same. But so what, you know? No two people have precisely the same views on all issues. I did something of great importance by launching The Great Safe Withdrawal Rate Debate and we are all continuing to learn stuff as a result 18 years later. We should be encouraging everyone to get involved. We need to examine these issues from all sides.

Part of the discussion should be — Why has it taken so long to get clear statements out before the public as to the errors in those studies? A lot of people planned retirements using those obviously flawed studies. It should’t take 18 years for stuff like this to happen. There should be ethical standards in this field. In a field with ethical standards, you would never see death threats or demands for unjustified board bannings or thousands of acts of defamation or threats to get academic reseachers fired from their jobs, none of the ugly Goon stuff. I mean, come on. We all need to know how stock investing works. So we all should be doing everything we can to help each other learn as much as possible.

The most significant idea that he puts forward in the article is the idea that Valuation-Informed Indexing worked from 1870 until 1996 and then stopped working. I don’t buy it. This is certainly the longest period of time that we have gone with prices remaining this high. That’s an important fact. People need to know that. So I don’t see that as a crazy position. But you have to look at more than what has worked for a certain number of years. You have to ask — WHY?

If the market were efficient, as the Buy-and-Holders say, market timing would never work. But it worked for nearly 130 years. Why? I think it is because gains that are the product of a CAPE level higher than 16 are rooted in irrational exuberance, not in economic realities. If that’s so, that’s huge. That’s something we need to figure out. Not next week or next month or next year. Now . Immediately. Last week. 18 years ago. 39 years ago. Like that.

So why hasn’t VII been working for the past 24 years? I think the crash has just been delayed. I have written in some depth on what may be going on on earlier occasions. It may be something as simple as the promotion of Buy-and-Hold. Investors feel safe not engaging in market timing today because they believe the claims that there is research backing up the Buy-and-Hold concept that timing is not required. Which is false, as Wade well knows. But millions of people believe it. So they don’t sell as soon as they would have in earlier days and the crash is delayed. But they will still sell eventually. And the loss of consumer buying power that will result when the CAPE drops dramatically could put us in a Second Great Depression. So this is something that we need to have many smart people examining in great depth.

I see the publication of the article as a nice step forward. I still believe in Valuation-Informed Indexing. But I have never said that I am God, I have never said that I have perfect knowledge. At least Wade’s criticism of the concept makes sense. And it wouldn’t surprise me even a tiny bit to see him flip back after the next price crash, which I still believe is coming (although I cannot say precisely when).

Anyway, I am certainly grateful for the link.

Wade Pfau Fan (As Always!) Rob