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 guess the entire world just has to suck it up and mindlessly agree with you, right? Everyone wants to be broke when they turn 60 and hope that their spouse dumps them, so that they can sit around all day and complain about how the rest of the world doesn’t treat them right.
The world will do what the world elects to do, Anonymous.
What I am going to do is to continue to say that I sincerely believe that the retirement study posted at John Greaney’s site lacks an adjustment for the valuation level that applies on the day the retirement begins.
There were a number of people at the old Motley Fool board who I over time came to think of as friends.
My best and warmest wishes to you and yours.
Rob
There is a long running thread on Bogleheads about how year 2000 retirees would do with a 4% withdrawal rate
Here is the most recent update
https://www.bogleheads.org/forum/viewtopic.php?p=7725975#p7725975
Looks like they are doing pretty good.
That thread contains what is great about Bogleheads, reasoned analysis backed up with real facts and figures.
John Walter Russell’s research showed that, when a retirement fails, it’s almost always because it suffered a major hit within the first ten years. The Year 2000 retiree saw a bit of a scare with the 2008 price crash, But prices recovered in late 2009. Those retirements have been in very good shape ever since.
But how are retirements that begin in 2024 going to hold up if we see a price crash later this year that takes the CAPE value from 32 to 8? The CAPE value usually falls to 8 in a Buy-and-Hold Crisis. That would be a loss of 75 percent of the value of the stock portion of the retirement portfolio. That sort of loss could be large enough to cause a retirement failure.
It would depend on how long it took for prices to recover. If someone’s plan was to take $40,000 each year from a $1,000,000 portfolio and he was left with $400,000 (I’m assuming an 80 percent stock allocation, which is less than the 89 percent stock allocation that Greaney described as “optimal”), he would be taking 10 percent out every year to cover living expenses. The risk of another price crash would be very small at that point (in fact, when prices are that low, the odds are strong that they will be going up by more than the average 6.5 percent price gain over the long term). But it’s entirely possible that prices would not recover for some time. A portfolio depletes quickly when 10 percent is being removed every year.
That retirement is not “100 percent safe” (Greaney’s phrase). Someone setting up that sort of retirement plan should be informed before he hands in his resignation of the risk he is taking on by going with a 4 percent withdrawal rate in a retirement plan beginning with the CAPE value where it is today. It’s unconscionable to ban discussion of the biggest factor affecting retirement safety — the CAPE value on the day the retirement begins.
The discussion being held at Bogleheads would obviously be a very, very, very different discussion if honest posting re the last 43 years of peer-reviewed research were permitted. The bigger point is that we would not have a CAPE value of 33 today (the CAPE value that applied in the weeks before the onset of the Great Depression) if honest posting re the research were permitted at every site. Stock prices would be self-regulating in a world in which honest posting re the peer-reviewed research were permitted. Each unjustified price increase would cause a number of stock investors to lower their stock allocation to keep their risk profile constant and those sales would pull prices back to reasonable levels.
Investors need access to accurate, honest research to make the sound allocation choices needed for the market to function smoothly. When Get Rich Quick/Buy-and-Hold “strategies” are promoted relentlessly and cannot be challenged effectively, we all suffer. We should all want stocks to be priced properly at all times. Irrational exuberance is the cancer of the personal finance realm. That’s where I’m coming from re this matter, in any event.
Rob
“The CAPE value usually falls to 8 in a Buy-and-Hold Crisis”
When was the last time the CAPE value fell to 8
The early 1980s.
Rob
It is possible that it will fall to 8 again during the rest of my investing lifetime. However I am not going to rely it happening since it is now over 40 years since it did.
You have been waiting for stocks to drop to historical lows since the mid 90s. You have been at 0% stocks for over 25 years now. That explains your current financial predicament.
You are free to “rely” on it or not rely on it as you please. I of course have no problem with that. I have a big problem with you telling others that it is “100 percent safe” to believe that stocks in the future will begin performing in ways in which they have never performed in the past.
It’s not just that we have seen a CAPE value of 8 in the past. It’s that the historical record shows that it is high CAPE values (irrational exuberance) that cause low CAPE values (irrational depression). Given today’s CAPE value, the odds that we will see a CAPE value of 8 in the not-too-distant future are much higher than what they would be if stocks were priced reasonably. So a 4 percent withdrawal is not “100 percent safe” for a retirement beginning today. We should all be permitted to speak honestly about these matters when talking things over with our fellow community members.
In have been at 0 stocks but not solely because of what I have learned from Shiller’s research. My personal circumstances are not the typical circumstances. I have never heard a reasonable Buy-and-Holder say that an investor should not take his personal circumstances into consideration when setting his stock allocation. I have been saying all along that an investor in typical circumstances should be going with a stock allocation of 30 percent when prices are crazy high. That ain’t 89 percent, as Greaney says is always “optimal.” But it ain’t 0 percent either.
If there had never been any abusive posting or criminal behavior, I would obviously be a multi-millionaire today. Going by the large number of our fellow community members who expressed a desire to learn more about Valuation-Informed Indexing, we know that there are many millions of people in the general population who would like to hear about what the peer-reviewed research in this field says about how stock investing works in the real world. This is a highly lucrative field. Show people a better way and you are going to be compensated well for doing so, presuming that any who engage in abusive or criminal behavior are reined in. I have been urging responsible parties to rein in the behavior of you Goons going back to the afternoon of May 13, 2002.
I naturally wish you all the best that this life has to offer a person, Evidence.
Rob