A Rich Life

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

“I Don’t Think That It Is Possible to Predict What Withdrawal Rates Will Survive. The Best That You Can Do Is to Assign Probabilities to Various Different Possibilities, Based on What Has Happened in the Past. When the CAPE Value is 8, the Safe Withdrawal Rate is 9.0 and the Odds of a Plan Calling for a 4 Percent Withdrawal Surviving are Very, Very High. When the CAPE Value is 44, the Safe Withdrawal Rate is 1.6 and the Odds of a Plan Calling for a 4 Percent Withdrawal Surviving Are Not at All Good.”

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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 intend to continue to say that the Greaney study lacks a valuation adjustment.”

We know that.

Because there is a lot of evidence that you are good at repeating that.

But there is also a lot of evidence that you are not good at articulating a reason why it should contain a valuation adjustment.

You continue to say that because it is easy.

It is more difficult to explain why it should contain an adjustment.

And it is much more difficult to conduct a study that predicts what future withdrawal rates will survive.

JFK said “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard”

The hocus equivalent would be “I choose to repeat the same things over and over again because it is easy”

I don’t think that it is possible to predict what withdrawal rates will survive. The best that you can do is to assign probabilities to various different possibilities, based on what has happened in the past. When the CAPE value is 8, the safe withdrawal rate is 9.0 and the odds of a plan calling for a 4 percent withdrawal surviving are very, very high. When the CAPE value is 44, the safe withdrawal rate is 1.6 and the odds of a plan calling for a 4 percent withdrawal surviving are not at all good.

I’ve already co-authored a calculator that gives the odds at the various CAPE levels. Had we opened every site to honest posting re the last 43 years of peer-reviewed research on the afternoon of May 13, 2002, we could have spent the last 22 years developing the Valuation-Informed Indexing concept and deepened and broadened our understanding of these issues in scores of amazing ways. Motley Fool called it “learning together.” All of the boards and blogs have the published rules that they have because they want to facilitate that process to the benefit of each and every one of us. The nasty Goon stuff takes things in the opposite direction and thereby holds us all back.

My sincere take.

Rob

“An Investor Who Goes With 60 Percent Stocks at Times of Moderate Valuations Needs to Be at 90 Percent Stocks When Valuations Are Insanely Low and at 30 Percent Stocks When Valuations Are Insanely High.”

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

Here is the simple formula for a secure retirement:

1. Maximize your income
2. Save as much as you can (20% minimum)
3. Avoid debt
4. Invest in low cost funds
5. Stick with a 60/40 or 70/30 portfolio depending on your risk tolerance
6. Always maintain an adequate emergency fund for unexpected expenses and/or gaps in employment

That is it.

The only one that I object to is #5. Both 60/40 and 70/30 are perfectly reasonable as an AVERAGE allocation (my personal inclination would be to favor 70/30). But, given the 43 years of peer-reviewed research showing that valuations affect long-term returns, an investor who fails to adjust his stock allocation in response to big valuation shifts is permitting his risk profile to go wildly off the mark. An investor who goes with 60 percent stocks at times of moderate valuations need to be at 90 percent stocks when valuations are insanely low and at 30 percent stocks when valuations are insanely high.

That one change is the difference between Buy-and-Hold and Valuation-Informed Indexing. Learning that we need to make that change is the biggest advance in our understanding of how stock investing works in the history of personal finance. We should be telling everyone about the importance of always, always, always practicing valuation-based market timing. Once we get the vast majority of investors on board, I think it would be entirely realistic to believe that we would never need to endure another bull market. Which means that we would never need to endure another bear market or another economic collapse. I can live with that, you know.

My best wishes.

Rob

“What’s Your Interpretation? Do You Think Irrational Exuberance Is a Good Thing? How Should We Combat It, in Your Assessment?”

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

Rob’s interpretation of what is peer reviewed research is full of Hocomania.

What’s your interpretation? Do you think irrational exuberance is a good thing? How should we combat it, in your assessment?

Rob

“I Think That We Can Get to a Place Where the CAPE Stays Within a Range From 13 to 21. That’s Not Ideal but It’s a Lot Better Than What We Have Seen in Recent Years (a Range From 8 to 44). It’s a Gentle Roller-Coaster Ride. A Gentle Roller-Coaster Ride Would Leave Us With a More Stable Stock market, a More Stable Economy and a More Stable Political System.”

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

When we all come around to your way of thinking how long do you think it will take for PE10 to correct from mid 30s to 17 (your “fair value” figure)?

That’s a good question.

I am not able not give a clear, precise answer. It is a very big change in human psychology that we are talking about, the difference between believing that the numbers on our portfolio statement are real and that bull markets are good and understanding that only gains rooted in economic growth are good and that irrational exuberance gains hurt us. If we were perfectly rational creatures, someone would have reported on the results of the Shiller research on the day it was published and every study rooted in Buy-and-Hold principles would have been updated immediately. That’s just not how humans operate. They need to ponder things and ask questions and so on before making such a big change. My aim is to get that process of reconsideration of first principles started.

The important thing is to open every site to honest posting re the research. Once we do that, we take the fraud element out of this. If someone says “I BELIEVE that 4 percent is always safe but I acknowledge that there are others who have other views and their views are supported by legitimate research,” that’s not fraud in my assessment. In that case, anyone who employs a 4 percent withdrawal in his retirement plan knows what he is getting into. So I don’t view that as fraud. If the person is not able to hear the message that valuations affect long-term returns because of abusive posting or criminal acts, that IS fraud and that’s obviously a very big deal. So that is my focus.

I have doubts whether we will ever get to a place where the CAPE value is always 17 or thereabouts. That would be the ideal. But I suspect that the Get Rich Quick/Buy-and-Hold/irrational exuberance stuff is too much a part of our human nature for it ever to go away entirely. That said, I believe that we can make big progress and that we are close to doing so. I think that we can get to a place where the CAPE stays within a range from 13 to 21. That’s not ideal but it’s a lot better than what we have seen in recent years (a range from 8 to 44). It’s a gentle roller-coaster ride. A gentle roller-coaster ride would leave us with a more stable stock market, a more stable economy and a more stable political system. I could live with that. It would leave us all richer than we could imagine being during the Buy-and-Hold/Get Rich Quick Era.

The one specific statement that I have made is that I am confident that we could get the number of investors who practice Valuation-Informed Indexing up from 10 percent of the population to 20 percent of the population within six months of opening every site to honest posting re the research. I think that will make a big difference. We won’t be seeing any more criminal behavior at that point. Perhaps some abusive stuff, but much less. Once we get to 20 percent, I think things will just continue moving in a positive direction. I can’t say how long it will take. But so long as you are making steady progress, you are obviously going to end up in a better place over time. It will be a very different feeling.

I don’t think we are going to get the CAPE down through education. I think it is going to take a price collapse, which of course translates into an economic collapse because of the huge loss in consumer buying power. At that point, we would be in our way to a CAPE value of 8 and those who favor research-based strategies will be saying that the CAPE value should be higher. To not permit honest posting re the research at that time would put the survival of our economic system in jeopardy. So at that time I think you may see some people work up the courage to step forward and to stand up to you Goons. We’ll see.

The way to think about this matter is to see that it is like other huge advances in U.S. history. The civil rights movement was stalled in the late 1950s. Some people believed that that could never change. However, we achieved huge progress in the 1960s. We didn’t make it all the way to the finish line. But I can see big changes. The same thing is true with concern re the environment. It is shocking to remember that it wasn’t that long ago when concern for the environment just wasn’t a public policy concern. Attitudes toward smoking have changed dramatically. I remember a time when it would have been considered rude not to provide ashtrays for visitors in your living room.Today, nobody invites smoking in their living room.

Attitudes on these big issues don’t change in a straight-line, gradual way. Big changes are scary. So people avoid thinking about them. But, if the changes are important enough, eventually they do and then there can be a lot of positive movement achieved in a short amount of time. Getting stock investing right matters. So I think we are going to pull it off. I don’t believe that it will happen prior to the onset of the next Buy-and-Hold Crisis. But my sense is that we are positioned to achieve big steps forward at that time.

Wish us luck!

Rob

“The Yankees Were Ahead By Five Runs at One Time in Yesterday’s World Series Game. If Someone Said ‘I Believe That There’s an 80 Percent Chance That the Yankees Will Win This Game,’ Would You Say That They Were Proven Wrong? I Would Not. The Historical Record Supported the Statement. We Saw an Outlier Outcome.”

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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 agree that in recent years stocks have not performed at all as I was expecting them to perform. That’s an objective fact.
In short, you were wrong. Just say the words, Rob.

The Yankees were ahead by five runs at one time in yesterday’s World Series game. If someone said “I believe that there’s an 80 percent chance that the Yankees will win this game,” would you say that they were proven wrong? I would not. The historical record supported the statement. But 80 percent is not 100 percent. We saw an outlier outcome. It happens. In baseball and in stock investing as well.

You’re saying that, because we have seen this outlier outcome in recent years, we should throw away all of the peer-reviewed research and go with the strategy that the peer-reviewed research shows never works in the long-term (failing to practice valuation-based market timing). I don’t buy it. The value of the peer-reviewed research is that it steers us away from our worst emotional impulses.

Permitting the CAPE value to get to where it is today shows a dangerous emotionalism on the part of stock investors. I don’t believe that that dangerous emotionalism just fell out of sky. It is the result of the relentless promotion of Buy-and-Hold strategies by our Wall Street Con Men friends. We are perfectly capable of investing in rational, effective ways. But there’s a lot of money to be made pushing the Buy-and-Hold stuff. So we at times engage in this unfortunate behavior. I think we can do better. The key is opening every site to honest posting re the peer-reviewed research.

Where I’m coming from.

Rob

“We Follow Buy-and-Hold Because It Makes Money. It Has Always Worked. We Have Chosen to Support Our Retirements and Our Family. We Don’t Want to Play Any Silly Games “

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

We follow buy and hold because it makes money.  It has always worked.  It has never failed any 30 year period in the entire history of the stock market.  We have chosen to support our retirements and our family.  We don’t want to play any silly games.  We don’t want to be broke.  We don’t want to live out a fantasy life.

I wish you the best of luck with it, Anonymous.

Rob

“We Have Never Seen a Buy-and-Hold Failure Over Any 30-Year Period for Our Entire History.”

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

We have never seen a buy and hold failure over any 30 year period for our entire history.  Meanwhile, we have never seen one successful outcome with VII.  Even you went broke.  You talk about retirement failures, yet you ignore the fact that you have a failed retirement.  Why would anyone think you are credible?

The Great Depression wasn’t a Buy-and-Hold failure? What was it, a big success?

Rob

Valuation-Informed Indexing #723: The Buy-and-Holders Failed to Distinguish a Theory from a Finding

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I’ve posted Entry #723 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Buy-and-Holders Failed to Distinguish a Theory from a Finding.

Juicy Excerpt: I wish that there the idea that market timing is not required or does not work was rooted in research. If it were, we could examine the research and point out whatever flaws there were in it that caused the Buy-and-Holders to reach their unfortunate conclusion. But there is no such research! Trying to refute the claim that market timing doesn’t work is like fighting with a ghost. Since the belief is based on nothing, there is nothing that can be argued to refute it.

Valuation-Informed Indexing #722: Stock Markets Can Remain Irrational for a Long Time — But We Can Change That

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I’ve posted Entry #722 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Markets Can Remain Irrational for a Long Time — But We Can Change That.

Juicy Excerpt: We are the market. Investors make up the market. Saying that the market has been irrational for a long time is another way of saying that we have been irrational for a long time. We can of course do things about that. Humans have been known to evidence irrationality in lots of areas other than stock investing. I cannot think of another area where we tell ourselves that it’s okay just to continue with the self-destructive behavior. When we see reckless driving, we create public service commercials advising people not to use cell phones when driving. When we have loved ones drop dead from heart attacks, we ask the doctors if there are changes we could make in our diet to avoid suffering the same unfortunate fate. In areas other than stock investing, we understand that irrationality hurts us. So we make an effort to rein it in.