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The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Valuation-Informed Indexing #649: Shiller’s Research Should Bring on a Reconsideration of the Great Depression

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I’ve posted Entry #649 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Research Should Bring on a Reconsideration of the Great Depression.

Juicy Excerpt: Wouldn’t the sudden disappearance of trillions of consumer spending power cause a massive economic contraction? It sure seems to me that it would.

Comments

  1. For over 20 years you have been telling us to wait to see how things turn out. We still haven’t seen this big crash you have been talking about. Let’s say you get to the age of 70 and the crash hasn’t happened and you haven’t received your $500 million windfall. Will you tell us that we still need to wait to see how things turn out or will you finally admit you were wrong?

  2. If I come upon evidence that the retirement study posted at John Greaney’s web site contains a valuation adjustment, I would certainly hope that I would possess the grace to acknowledge that I was wrong to come to believe that it did not.

    If I do not come upon such evidence, I will continue to believe that the Greaney study lacks a valuation adjustment and I will continue to say that.

    Does that help?

    Rob

  3. So you are saying that it no longer matters how things turn out and that all that matters is if people eventually change their minds and agree with you on Greaney even if they are broke like you. Got it.

  4. I’m going by how it has always turned out in the past. When stock prices reached the crazy level that applies today, they eventually corrected. So you cannot count the amount in your portfolio that is only irrational exuberance as if it is real. You can count on the portion that represents real economic gains to finance your retirement. But not the portion that is just irrational exuberance. That portion is funny money. It is not real and it is not lasting.

    Does that help?

    Rob

  5. “ I’m going by how it has always turned out in the past. ”

    Okay then. The 4% withdrawal rate has always worked in the past. Buy and hold has always worked in the past. Those that had sufficient savings when they retired always worked.

    If you did not see this crash you are waiting for and you never got even one penny of your $500 million windfall and you never got a job to fix your broken retirement plan, do you still see yourself as successful? Are you measuring yourself differently then the way the rest of us are measured?

  6. A 4 percent withdrawal always worked in the past but it was not always safe in the past. At the valuation level that applied in 1929, a 4 percent withdrawal has a 50 percent chance of working out and a 50 percent chance of failing. The fact that it worked out didn’t retroactively make it safe.

    To find out if something is safe, you need to look at the factors that affect safety. One of those factors is the valuation level that applies on the day the retirement begins. If you look at all of the factors, you get very different results than if you use the methodology used in the Greaney study.

    My sincere take.

    Rob

  7. “A 4 percent withdrawal always worked in the past”

    Nailed it!

  8. Okay. But Greaney’s study doesn’t say that a 4 percent withdrawal always worked in the past. It says that a 4 percent withdrawal is safe for retirements taking place today. Whether that is so or not depends on the valuation level that applies today. People putting together retirement plans need to know about the error that he made in failing to distinguish the two.

    Yes?

    There were people at the Motley Fool board who were using the Greaney study as guidance in putting together retirement plans. I was there.

    Rob

  10. It’s possible that it will survive. It’s also possible it will fail. It depends on what the CAPE value is on the starting date of the retirement. For retirements that began in January 2000, the odds that a retirement with a 4 percent withdrawal would survive was only 30 percent. That ain’t safe. It’s not a remotely close call.

    We should permit honest posting at every site.

    Rob

  11. You said that you are looking at what has worked in the past. 4% has always worked when looking at the past. Getting a job and bringing home a check has always worked as well.

  12. Taking an extremely risky bet with one’s retirement money worked on a tiny number of occasions in the past. Driving drunk has worked on tiny number of occasions as well. That doesn’t make it “100 percent safe” to drive drunk in the eyes of any reasonable person.

    Valuations have been affecting long-term returns for as far back as we have records of stock prices. So any analysis of safe withdrawal rates that is based on what happened in the past needs to take valuations into consideration.

    Rob

  13. So you are doing the opposite of what has worked in the past and expecting a successful outcome. Sorry, but I am not interested in risking my retirement to make you happy.

  15. You just have to stick with the basics of what works, as follows:

    1. Get a job and/or have a business that generates a reasonable income
    2. Save at least 20% and invest it in low cost index funds, for at least 30 years
    3. Avoid schemes and short cuts (like market timing)
    4. Avoid situations that can disrupt you plans, such as taking on risky debt or getting divorced
    5. Max out all your retirement plans and maximize your social security benefits.

    This plan is simple and straight forward. Is it hard? It depends it how you look at it. Any job can have its stresses and you can’t control everything. Marriage takes work as well. The rest of it just takes discipline.

    None of this is complicated. You don’t need to seek out any “insights, learnings, etc.”. Just stick to the basics and follow what has always worked in the past.

  16. Market timing is price discipline. It’s not a short-cut. It is essential. No market can remain functional without the majority of participants in it practicing price discipline. We should all be willing to do what it takes to keep the stock market functional. When it becomes so dysfunctional that it crashes, we all pay a terrible price.

    My sincere take.

    Rob

  17. Market timing is a failed strategy. We have never seen even one successful it one with VII. You know this and that is why you keep telling us that the future will be different.

    If you had followed the steps laid out above, you would be sitting on several million right now, correct?

    If I followed your steps, I would have much less than $6.4 million, right?

  18. You don’t even know how much you have, Anonymous. You don’t adjust the number on your portfolio statement for the effect of irrational exuberance.

    Rob