Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“You need to look at what survived in the past in similar conditions (that is, at similar valuation levels).”
The studies look at what survived in all conditions, including the highest valuation levels.
Even if you just restricted your search to the very small subset of occasions when valuations were at there highest you would find the same thing. 4% survived on every occasion.
Imagine these are the percentage withdrawal rates that survived.
6.2 5.3 7.4 9.3 6.1 8.2 (Low valuation)
4.7 6.3 7.1 7.2 5.3 6.5 (Medium valuation)
5.4 5.5 4.0 4.9 6.2 4.7 (High valuation)
As you will note 4.0 is the lowest
If you divide the numbers into 3 groups L M H valuations you will notice that the low in the L line is 5.3 and in the M line 4.7
But the low in the high valuation line is 4.0. Just looking at the high valuation subset does not get you a number below 4.0
This is why I often use the analogy of drunk driving, Evidence. Driving sober is highly safe. You could go on hundreds of drives and not get in a single accident. Driving drunk is insanely risky. You can’t mix it all together and conclude that driving drunk is “100 percent safe.”
Say that you have driven sober 146 times and never had a single accident. And you drove drunk four times and were in accidents requiring hospitalization each time. But you didn’t quite die in any of those accidents. Would you conclude that driving drunk is “100 percent safe.”
That’s not what the data is telling you. It is telling you that driving drunk is insanely risky. The next time you drive drunk, you might well end up dead. It is POSSIBLE that you will only require hospitalization one more time. But you are taking a big chance.
So it is with withdrawal rates. Take a 4 percent withdrawal in a retirement beginning when the CAPE is 44 and there’s a 30 percent chance that you will have at least one dollar remaining in your account after 30 years. But there’s also a 70 percent chance that that retirement will go bust. Having a one in three chance of seeing your retirement survive is not going with a plan that is “100 percent safe.”
Not according to this boy.
I naturally wish you all good things.
Rob
Thanks for confirming that 4% has always worked. Meanwhile VII has never worked.
To show that something survived is not the same thing as showing that it is 100 percent safe. To show that something barely survived on a tiny number of occasions actually shows that it is not safe at all, that there is a very good chance that it will fail on the next occasions on which it is tried. People acknowledge these realities in every field of human endeavor outside of the investment advice field. There should be a 100 percent consensus today that it is an urgent piece of business for us as a nation to figure out why these realities are not acknowledged in the investment advice field as well.
Human rationality is a plus, It helps us make our way through life, We should give ourselves permission to make use of human rationality in the investment advice field, It’s not just about saying whatever it takes to turn a quick buck. It can’t be. The level of success that people achieve with their stock investments affects the extent to which they achieve their life goals. This stuff matters. It affects people’s lives.
My sincere take.
Rob
So you want to hide the fact from investors that 4% worked every time and you don’t want to tell them that VII has never worked. Got it.
I want investors to know that there are times when a 4 percent withdrawal is super, super, super safe, when even a 9 percent withdrawal is perfectly safe. And I want them to know that there are other times when a 4 percent withdrawal is insanely risky, when no withdrawal rate above 1.6 percent is truly safe and when a retirement plan calling for a 4 percent withdrawal has only a 30 percent chance of surviving for 30 years.
And I want investors to know about the peer-reviewed research that I co-authored with Wade Pfau showing that practicing market timing permits them to retire many years sooner while taking on dramatically reduced risk. I don’t think that Wade ever should have been threatened. I think extortion of academic researchers hurts us all. It is a crime and we all should be working together to see that that crime is prosecuted. I believe that Wade hit it on the head when he declared: “Yes, Virginia, Valuation-Informed Indexing works!”
Rob