Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
A little hunting around got me this
“In other words, a particularly bad returns sequence <b>can reduce</b> your safe withdrawal amount by as much as 2% below the long-term return of stocks. Recall from Chapter 2 that <b>it’s likely</b> that future real stock returns will be in the 3.5% range, which means that current retirees <b>may not be</b> entirely safe withdrawing more than 2% of the real starting values of their portfolios per year!”
can reduce
it’s likely
may not be
contrast this with “the safe Withdrawal rate was”
When you are quoting someone (eg. your Yes Virgina comment by Wade) you use quotation marks, with this comment from Bill Bernstein you never do. Because you know that it is not accurate. He was clearly not making the certain comment that you depict, but rather was speculating about possible future returns and withdrawal rates.
No. Bernstein was saying that Greaney’s claim that a 4 percent withdrawal is always “100 percent safe” was in error. The safe withdrawal rate is the number that works in the worst-case scenario. When the starting point valuation level is what it was in January 2000, the withdrawal rate that worked in a worst-case scenario was 2 percent, not 4 percent. 4 percent COULD POSSIBLY WORK. That is certainly so. But it was not “100 percent safe.”People using the Greaney study to construct a retirement plan or to decide when to hand in a resignation from a job need to know that.
That’s the entire point of the 22 years of discussion. People need to be able to hear both sides of the story. Could 4 percent work, even for retirements beginning at very high valuation levels?Absolutely. Is it “100 percent safe” at such times? Not even close. Valuations are the biggest factor affecting risk for stock investors. So we should be looking at the effect of valuations on risk at every site where stock investing is discussed.
Rob
Here is something interesting to consider. You are spinning the work by Shiller stating that you think the market will take a huge dump because of your CAPE analysis. As such, you are totally relying on what you think will happen based on your analysis of history.
How, you have a totally different view on Greaney’s work. Greaney look at historical withdrawal rates and we can see that a 4% withdrawal rate has worked in every single 30 year period. Now Greaney is pointing out the historical stock market results and withdrawal rates. You say that we now have to ignore the historical market when it comes to Greaney.
So, for your story to work, you say we should only look at the historical market when it comes to Shiller, but we have to ignore it when it comes to Greaney because it doesn’t fit your crash and burn scenario that includes your opinion that the market won’t recover like it has in the past in sufficient time.
Sorry, Rob. You can’t apply two standards when you want to say the historical market repeats on one hand, but not the other.
Greaney reported accurately what has always survived, His error is in thinking that, because something has survived on a number of occasions, it is “100 percent safe.” There is no other field of human endeavor in which anyone would say that. If someone drives drunk four times and doesn’t die, that doesn’t make the act of driving drunk “100 percent safe.” It just doesn’t work like that. Safety and survival are not the same thing.
A 4 percent withdrawal worked for retirements beginning in 1929. Those retirements were not safe. In 50 percent of the return sequences we have seen, they failed. It just so happens that people who retired in 1929 got lucky. The next time someone uses a 4 percent withdrawal starting from that valuation level, they might not get so lucky.
To assess whether a particular withdrawal rare is safe, you need to look at the factors affecting safety. The most important factor has always been the valuation level that applies on the day the retirement begins. So safe withdrawal rate studies need to include a valuation adjustment, There’s no other way to get the number right.
Rob
No 30 year period has ever failed, Rob. You can’t have it both ways. You can’t say on one hand to look at the historical market and then say just the opposite when it doesn’t suit you. If you doubt Greaney, you have to doubt Shiller……..and that means you are also wrong.
I agree that a 4 percent withdrawal has not failed in any 30-year time-period in the historical record.Yes, that’s history.
But, no, that doesn’t make a 4 percent withdrawal safe for a retirement beginning today. Throughout history, the most important factor affecting safety has always been the valuation level that applies on the day the retirement begins. Someone who believes that history is a good guide to what will happen in the future would say that any analytically valid calculation of the safe withdrawal rate must include consideration of the valuation level that applies on the day the retirement begins. Given that it always was a factor in the past, why wouldn’t it continue to be a factor in the future?
You are acting as if the concept of being safe and the concept of having survived are the same thing. They’re not.
Now — If the CAPE level had been 44 in every year of our stock market history from 1870 until today and 4 percent had always survived, then I would agree that it would be fair to say that 4 percent had shown itself to be safe. That’s a lot of data points. But that’s not the situation. We have only had one month when the CAPE hit that level.One data point is not enough to show that that withdrawal rate is safe at that valuation level. And that withdrawal rate barely survived on the earlier occasions when it was used starting from a valuation level that was super high. That shows that the valuation level matters when it comes to safety and should never be ignored.
You are too impressed by the small number of times that a high-risk withdrawal rate has survived. Saying that something is high-risk is not saying that it is certain to fail. It is saying that there is a chance that it might succeed and a chance that it might fail. There was a good chance that a 4 percent withdrawal for a retirement that began in 1929 would fail. It happened to succeed. That fact doesn’t retroactively make that withdrawal rate safe. It was high-risk in 1929 and it was still high-risk in 1959, when it had survived 30 years. Sometimes a high-risk withdrawal rate will survive. But a high-risk withdrawal rate will never retroactively become safe. Safety has to be determined at the time the retirement begins. In 1929, that withdrawal rate was high-risk because it was not known at that time whether the returns sequence that would come up would be a lucky one or an unlucky one.
All that Greaney showed is that it is POSSIBLE that a 4 percent withdrawal rate will work out starting from a super high valuation level. It is possible. The historical data shows that. It does not show that it is safe. It shows that it is high-risk.
Rob
You use history to support YOUR opinion on the market crash. For YOUR timing scheme to work, you need the big crash. You say that history has always worked for your scheme (even though you say that the market is currently not following history). So you want to pick and choose what fits history and when to ignore it so that it all fits your narrative. Clear hypocrisy.
No. We do not have enough history to say precisely what will happen. We have enough to say that risk is much greater at times of high valuations. But we cannot say precisely when prices will crash.
We know some things and we do not know some other things. We should say the things we know and avoid saying the things we do not know. We should tell people that stock investing risk is higher at times of high valuations and thus investors who want to keep their risk profile stable over time need to lower their stock allocations at such times. But we should not say “there will be a price crash on such and such a date.” Because we just don’t know that.
I believe that history is a great guide, the best guide that we have. One of the many things that I like about the Buy-and-Holders is that they were the one who urged using history as a guide. I do not believe that history tells us everything. That’s because there is not yet enough history. When we have 10,000 years of historical data, we may be able to make better predictions of when price crashes will arrive. It’s also possible that we will never be able to do that because it is shifts in investor emotion that cause price crashes and investor emotion is an irrational phenomenon so it may never be highly predictable. In any event, we cannot make such predictions effectively today. So we should not advance them.
But we can say that, once prices get high, their long-term direction is down. That’s been so for 150 years running. So that’s a safe prediction. High prices beget years of low returns and low prices beget years of high returns. I read that in Bogle’s book before I ever read Shiller’s book. It was Bogle that helped me to understand why Greaney’s study is in error, not Shiller. Shiller of course added to my understanding later on. But Bogle is the true cause of all this. I would guess that the reason why Bernstein stated that the Greaney number is in error is that he had read Bogle. Bogle is the real trouble-maker.
I believe that the market is today operating under the same principles that it has operated on throughout history. The results that we have seen in recent years have been outlier results. But that is going to happen from time to time. It doesn’t mean that the principles have changed. It just means that the details by which things play out are a little different. I think we are going to see the Same basic pattern this time as we have seen for the entire history of the market. a failure to pay sufficient attention to valuations will cause us all a great deal of misery.
I would like to see us learn from history instead of continuing to make the same horrible mistakes. The benefit of permitting discussion of the peer-reviewed research is that it permits us to learn from history. I view the ban on honest posting re the peer-reviewed research as irrational. I think that the irrationality that we have seen during the first 22 years of our discussions supports Shiller’s belief that stock investors are not always 100 percent rational but at times become highly emotional. I see the reining in of investor emotion as being 70 percent of what it takes to achieve successful long-term stock investing success. It’s the key to the entire project.
Rob
I spent some time last night transforming the most recent comments that merit it into future blog entries. I woke up this morning with a new chapter title for the section on “The Theory Behind Valuation-Informed Indexing” in my head. The chapter title is: “The Buy-and-Holders Find Shiller’s Research Findings So Compelling That They Cannot Ignore Them Unless Discussion of Them Is Banned.”
That’s a big part of the story here. You Goons used the word “annoying” in some recent comments. I am always talking about Shiller’s research findings and you find that annoying, so you must insist that I be banned. It would make sense that you would find research that cuts against your personal beliefs a little bit annoying. But the normal thing would be just to ignore the discussions you don’t enjoy. You do your thing and let others who want to participate in those sorts of discussions do theirs. You can’t do that. Never once have you tried. Those discussions drive you absolutely bonkers. They need to be banned for you to be able to face the new day.
Shiller’s reseatch findings are common sense. OF COURSE valuations affect long-term returns. How could it be any other way? Valuation-based market timing is price discipline. Price discipline is absolutely essential in every market that has ever existed. What possible reason could there be for thinking it might be different in the stock market?
It’s not different. And it drives you bonkers to be reminded of that. All of your energies are devoted to tuning out that simple and essential and obvious reality. So, if some fellow comes along and gives voice to it every day, he needs to be removed. That’s why these discussions have been so strange. I like research. I want to share with people what it says. And you can’t freakin’ stand it. Research is the enemy. Research undermines Get Rich Quick/Buy-and-Hold and the Get Rich Quick fantasies about the value of your stock portfolio that are encouraged by the numbers that appear on your portfolio statement and that make you feel happy and satisfied and safe in a deep way.
Reality is the enemy to a Get Rich Quicker/Buy-and-Holder and research helps us to see the realities. Shiller’s research is highly, highly, highly “annoying,” in your word. I am annoying because I talk about Shiller’s research. The normal thing would be to ignore me and to permit others to engage in whatever discussions with me that they want to engage in. But the entire thought that valuations might affect long-term returns is just too fraught for you to even consider such a thing. The idea that valuations might affect long-term returns is the scariest thought in the world to you. You want to ignore it and I want to bring it to everyone’s attention. We are working at cross purposes.
Rob
“ I spent some time last night transforming the most recent comments that merit it into future blog entries. I woke up this morning with a new chapter title for the section on “The Theory Behind Valuation-Informed Indexing” in my head. The chapter title is: “The Buy-and-Holders Find Shiller’s Research Findings So Compelling That They Cannot Ignore Them Unless Discussion of Them Is Banned.””
So I guess that means that the July deadline for the book is going to get pushed out again, right?
I doubt that I am going to meet the July target date for finishing the book.
Rob
“ I doubt that I am going to meet the July target date for finishing the book.”
Wow, what a shocker! I guess there is no hurry to save the world then right? No hurry to get that $500 million?
Getting it done right is 20 times more important than getting it done quick.
My sincere take.
Rob