I’ve posted Entry #522 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called New Article on Safe Withdrawal Rates Shows How Far We Still Have to Go.
Juicy Excerpt: There’s a frankness about the issue of safe withdrawal rates that I believe is vital that is missing from this article. Why is it only now that we are seeing articles dismissing the 4 percent rule, given that Shiller published his Nobel-prize-winning research showing that valuations affect long-term returns (and that, thus, the safe withdrawal rate is a number that varies with changes in valuation levels) 39 years ago? It is because it is widely viewed as economically incorrect to point out the error at the core of the Buy-and-Hold Model — the idea that there is no need for investors to engage in market timing. If, as Bengen correctly observes, retirement is easier at times when stock prices are low, it’s because stocks offer a stronger value proposition when prices are low. So of course buying more stocks at such times (market timing!) always works. Why not tell people that?
Bengen makes the point about the benefits of market timing, which is certainly a plus. But he does not highlight the point. My view is that it should be in the headline. But Bengen crafts his article to downplay the point. One thing that he does is to examine a portfolio comprised of only 50 percent stocks. Back in the day when the 4 percent rule became popular, researchers were examining portfolios comprised of 80 percent stocks. By lowering the stock allocation, Bengen is able to show a high safe withdrawal rate at times of high stock valuations.
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