“We All Want to Invest Rationally, for Obvious Reasons. And We All Want to Get Something for Nothing Because That’s a Universal Human Weakness. Buy-and-Hold Serves the Second Desire; That’s Why It Is So Popular. Valuation-Informed Indexing Serves the First desire; That’s Why It Works in the Long Term.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“It’s about letting people know that the Greaney retirement study lacks a valuation adjustment.”

Is there anyone who thinks the Greaney study does contain a valuation adjustment?

That’s a good question.

There’s no one who has looked for one and found one. People don’t think it through.

Greaney says that a 4 percent withdrawal has always worked. That’s an accurate statement. Then he concludes that a 4 percent withdrawal is safe. That doesn’t follow. At times when valuations were high, a 4 percent withdrawal BARELY worked. It worked because there was a lucky returns sequence, not because that is a safe withdrawal rate for retirements that begin at times of high valuations. The claim is a false one. But it sounds PLAUSIBLE to people who haven’t thought things through carefully.

I argued that we should think things through carefully. When people did that, they began to lose confidence in the claims of the Greaney study. Greaney ddin’t like that. So he went into freak-out mode.

No one truly believes that Greaney included a valuation adjustment in his study. And no one truly believes that valuation-based market timing is not 100 percent required for every investor. There’s a tension between two desires possessed by every investor. We all want to invest rationally, for obvious reasons. And we all want to get something for nothing because that’s a universal human weakness. Buy-and-Hold serves the second desire; that’s why it is so popular. Valuation-Informed Indexing serves the first desire; that’s why it works in the long term.

I want to tell people what works. That makes me a threat to those who want to push what sells. Is it all about turning a quick buck? Or should there be some concern about what happens to the lives of the people who follow the investment strategies that do the best job of turning a quick buck?

I asked a question. Should we be looking at valuations when we calculate the safe withdrawal rate? Lots of community members thanked me profusely for starting the most exciting discussion ever held in the history of that board. The answer to the question was a resounding “yes!” Of course we should be taking valuations into consideration. We just hadn’t done it until then because people were afraid to invite Greaney’s wrath by doing so. No one was asking the question before I raised it.

It’s a con, Evidence. A lot of cons make no sense once you’ve see through them. What usually happens with a con is that you fall for something stupid because you very much want to fall for it. There’s deception on the part of the person working the con. But the bigger factor is the self-deception of the people who long to believe in the con. Anyone could have checked the Greaney study and saw that it lacked a valuation adjustment. But most people didn’t want to know. They wanted to believe the nonsense. By raising the question, I made it very hard or impossible for them to remain in the dark.

That’s what I wanted to do. Greaney and you want people to remain in the dark. We are working at cross purposes.

Rob