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

Uh oh. Michael Kitces says that you are wrong on the SWR.

https://www.marketwatch.com/story/dont-cheat-yourself-with-the-4-rule-2018-05-04?siteid=yhoof2&yptr=yahoo

We need you to correct your mistake by close of business today and end your campaign of fraud.

Michael and I have had numerous conversations about safe withdrawal rates, as you know. I think that Michael is right about a lot of things. I also think that he is very, very wrong about one point. Those interested in knowing more about those conversations can check out the blog entries filed under the “Michael Kitces and SWRs” category.

I like what the article says about the SWR being a highly conservative number. It is that. An argument can be made that it is too conservative. One of the things that I did with the Retirement Risk Evaluator is to permit aspiring retirees to check out how much they can change the withdrawal rate by permitting a bit more risk. The calculator defines a withdrawal rate with a 95 percent chance of working out (presuming that stocks perform in the future somewhat as they always have in the past) as “safe.” What if the aspiring retiree is okay with using a number that has only an 80 percent chance of working out? The calculator provides that number. There’s nothing wrong with choosing only 80 percent safety. The level of safety is a judgment call for the retiree to make. So I think it is a good idea to supply that number. Having a 95 percent chance of things working out is super safe. But having an 80 percent chance is still reasonably safe. I think that moving away from the one-size-fits-all approach is a good idea.

That’s different, of course, from outright lying about what is safe. Greaney claimed that the 4 percent withdrawal was “100 percent safe” even when the CAPE level was 44 and the last 38 years of peer-reviewed research shows that a withdrawal rate of 4 percent had only a 30 percent chance of working out. Going with a retirement that has only a 30 percent chance of working out is insanely reckless behavior. Aspiring retirees need to know that. And of course Greaney made it 10,000 times worse when he responded to questioning of the methodology used in his study with death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs. Financial fraud is a felony in the United States. Not good.

Michael does not speak clearly on whether he believes that that sort of behavior is fraud. He doesn’t engage in it himself. That indicates that he does not approve of it. But he holds back from personally condemning it. He should personally condemn it. When we permit that sort of behavior, we hurt people. We hurt both the retirees whose lives are destroyed and also the con men putting forward the death threats. Greaney wouldn’t be looking at a prison sentence today if Motley Fool just gave him the boot back in June of 2002, when I implored them to. By failing to act, Motley Fool made the situation worse. Michael has done the same. I am proud to say that I spoke up.

I agree with another point made in the article. Retirees should certainly feel free to take a higher withdrawal rate in cases where they have other sources of income. That one is obvious. I don’t see how anyone could disagree with that. But the point being made is valid. There are some people who would feel funny about not taking the precise withdrawal rate being generated by a calculator even when that is justified by factors not considered by the calculator’s methodology. People making calculators should always specify the circumstances in which other numbers make better sense.

That’s actually one of the big problems with the 4 percent number. Valuations aren’t even considered in the calculation of that number. People using calculators that generate that number in all circumstances should be warned that the calculators do not take into consideration the effect of valuations and thus cannot work in worlds (such as ours!) in which the valuation level that applies on the day the retirement begins affect the result. There is no one withdrawal rate that works in all circumstances. I have been saying that since the morning of May 13, 2002, and now this article points out that Michael Kitces believes this as well. Good for Michael.

I don’t like the reference in the article to how the 4 percent rule is based on what happened following the Great Crash of 1929 and the Great Depression. It is of course true that the 4 percent number was based on a worst-case result scenario and that makes it sound very safe. But the returns sequence that we saw in the 30-year time-period from 1929 fortunate was actually on the lucky side. It was the valuation level that applied in 1929 that was insanely risky.

The reality is that a 4 percent withdrawal had only a 50 percent chance of working out for those who employed it at the time. We can look back now and say that it succeeded. But no one who understands the message of the past 38 years of peer-reviewed research in this field would say that it was safe. A 4 percent withdrawal at that time was a high-risk bet that happened to work out.

Just barely, by the way. Retirees who took a 4 percent withdrawal in a retirement that began in 1929 ended up with $1 remaining in their portfolio in 1959. Good retirement planning would not be telling people to use a withdrawal rate with only a 50 percent chance of working out and leaving only $1 in the portfolio at the end of 30 years. That’s very scary stuff.

And of course the valuation level was a lot higher in 2000 than it was in 1929. The 2000 retiree who took a 4 percent withdrawal had only a 30 percent chance of seeing his retirement plan succeed for 30 years. Not safe. Not a close call. Not at all good. I favor a policy of reporting the numbers accurately and honestly. Sometime the safe withdrawal rate is a number larger than 4 percent. We should tell people that. Sometimes the safe withdrawal rate is a number smaller than 4 percent. We should tell people that too.

I naturally wish you all the best that this life has to offer a person, Anonymous.

Honest Safe-Withdrawal-Rate Reporter Rob

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

Note that Michael states the following in the comments section:

“The “good” news is that this doesn’t really change SWR much, as the reality is that the SWR results all come from high-valuation environments in the first place.

Actually, the key distinction is that if you retire and valuations are NOT high, the SWR is more like 5%-6%, not 4%! See https://www.kitces.com/may-200… for my original research on this nearly a decade ago.

– Michael

As such, it seems you missed Michael’s main point of his article. It is clear in the comments section and in this article that you don’t really see this as the point he was making. Notice that while you made a comment, Michael avoided responding to you while he responded to others.

Michael is wrong about this, Sammy. Shiller showed that valuations need to be considered. The SWR is not a single number but a number that changes with changes in the valuation level. Michael is of course correct when he says that the SWR rises to a number higher than 4 at times of low valuations. But he is of course wrong to say that the SWR does not drop to levels lower than 4 at times of high valuations. It works in both directions!

It’s not hard to figure out why Michael would be happy to point out that the number changes in one direction because of valuations but not in the other. That’s just good marketing! When you tell people that they can retire earlier than they thought they could, you make them happy. Happy people like you and people who like you link to you and hire you to give them advice and buy your books and all this sort of thing. When you tell people that it is going to take the longer to be able to retire than they thought, they do NOT like you. I tell people that side of the story too. That is anti-marketing! It hurts my popularity for me to tell people that. Big time. Most people in this field do not want to do harm to their popularity. So they don’t say that sort of thing.

That’s the story in a nutshell. Buy-and-Hold was a huge advance because the core idea was that we should use peer-reviewed research to guide our investing decisions. That takes things out of the realm of subjectivity and into the realm of objectivity. But we still have humans doing the calculations and reporting them. So there is still the risk of subjectivity entering the picture. The “idea” that valuations affect the result in only one direction is pure subjectivity. It’s a marketing trick. It works because people love hearing that they can retire early. They so much want to believe it that they are able to almost convince themselves.

But what do you think is going to happen following the next price crash? People are going to be angry that they have lost most of their life savings. That will change the marketing dynamic in a huge way. People will then demand honest calculations and Buy-and-Hold will be replaced with Valuation-Informed Indexing. The fantasy stuff that the Buy-and-Holders put out (in which valuations have an effect in one direction but not in the other) will not make the sale any longer.

Michael would be happy to tell people the truth about this if he had cover. He needs to see enough others telling the truth so that he would not stand out in telling people a message that they do not want to hear. We’re not there yet. But we are getting close.

Michael feels bad about this. He sees the merit in my points. He has told me so in our e-mail exchanges. But he does not feel comfortable going public with the side of the story that is anti-marketing. But he is obviously going to flip following the next price crash. For now, he doesn’t comment on my posts. But he doesn’t remove my posts either! He does permit people to see them. He goes a step past where a lot of others go by doing that. He’s not perfect. But I think it would be fair to say that he does a lot better than most in raising the points he does and in permitting people like me to leave fully honest comments at his blog.

My aim is to free Michael and lots of others to be fully honest on all investing questions. When that happens, we all benefit from 34 years worth of insights being produced in a small amount of time. There is huge leverage in getting enough people to feel comfortable posting in full honesty to create an environment in which all others also feel comfortable posting in full honesty. We all want the same things. The hard part now is creating that safe environment. People like Michael are helping to move the ball although I obviously would like to see him do more.

Rob

 

 

 

Set forth below is the text of a comment that I recently posted to an article on safe withdrawal rates posted by Michael Kitces at his blog: 

Michael:

This is an A+++ article. You make some amazingly important points that have been generally overlooked by most in this field for years now. I write a weekly column at he Value Walk site on Valuation-Informed Indexing. I will be exploring this article in depth in one of my future columns there.

The point you make re how high valuations predict low returns 10 years out but higher returns down the road is of HUGE significance. This is very troubling for the millions of retirees who relied on the infamous “4 percent rule” in planning their retirements. Almost all retirement failures come about because of poor returns suffered in the first 10 years of the retirement. What we are seeing is that the 4 percent rule put MILLIONS on the path to suffering failed retirements because they suffered or will soon suffer big losses in the first 10 years of their retirements. The data shows that the odds of a high-stock retirement portfolio used in a retirement beginning in 2000 and employing the 4 percent rule surviving for 30 years was only 30 percent at the time that retirement began. Not safe! Not close!

The other big issue here is WHY do things go as you properly state they do — Why do high valuations predict different things in 10 years and in 30 years? This is just what we should expect to see if Shiller is right that it is investor emotions that serve as the primary determinant of stock prices rather than economic developments. Investor emotions follow the same pattern over and over again. Valuations go up and up and up for about 20 years as investors come to appreciate the fun in voting themselves free money. Then valuations get so high that investors become fearful and pull prices down to levels as insanely low as they once were insanely high.

Stocks will perform poorly for the next 10 years or so. But once we reach a P/E10 level of 8 or perhaps a bit lower, the psychology will change again and we will begin a 20-year secular bull market. This is why it is so important that investors lower their stock allocations at times when prices are insanely high. The capital that is protected by going with a low stock allocation can be invested in stocks paying amazing returns on a going forward basis once prices have gone to insanely low levels. The result is that those investors who used the peer-reviewed research of the past 34 years as their guide can retire many years sooner than those who followed Buy-and-Hold strategies.

When the compounding returns factor is incorporated into the analysis, the difference can be in the many hundreds of thousands of dollars. The impact of taking valuations into consideration when setting one’s stock allocation is counter-intuitively big.

Thanks much for the great work you have done in this area.

Rob

 

My good friend Michael Kitces has posted an important article re safe withdrawal rates (and valuation-informed strategies in general) at his blog. It is called Should Equity Return Projections Be Reduced for Today’s High Shiller CAPE Valuation?

Juicy Excerpt #1: A look at the available market data suggests that realistically, it would be appropriate to reduce equity return assumptions by about 100bps (or 1 percentage point) over the next 30 years, to reflect the current valuation environment. Ironically, the reduction is not greater, because 30 years is such a long time that even if returns are bad for a period of time, there are enough subsequent years to recover as well.

Juicy Excerpt #2: Ultimately, then, the ideal way to adjust return assumptions in a retirement plan in today’s environment may not be to reduce long-term returns at all, but instead to do projections with a “regime-based” approach to return assumptions. This would entail projecting a period of much lower returns, followed by a subsequent period of higher returns, in a manner that more accurately reflects the impact of market valuation on returns – and better accounts for the sequence-of-return risk along the way as well!

Juicy Excerpt #3: While over 30 years, market valuation suggests that the long-term return should only be changed about 100bps above or below the overall average, on a 15-year basis low-valuation environments have an average real return of 10.4% while high-valuation environments average only 1.9%!

Juicy Excerpt #4: High valuation actually predicts good future returns beginning in 15+ years, albeit only at a “cost” of bad 15-year returns between now and then. In today’s context of high market valuation, this implies below-average returns between now and 2030, but unusually high above-average returns in the 2030s and 2040s!

Juicy Excerpt #5: The optimal way to adjust retirement projections for extreme levels of high market valuation is not to reduce long-term returns by a little, but to reduce “intermediate” term returns by a lot for the current low-return “regime”, followed by a subsequent period of significantly higher returns (as the first 15 years of low returns amidst any level of ongoing economic growth eventually results in a low return environment). Doing so is superior because it more properly matches the true risk of high-valuation environments: exacerbated exposure to sequence of return risk, as valuation extremes trigger an especially high likelihood of a bad decade of returns, which is especially problematic for retirees sensitive to the first decade’s worth of returns!

Juicy Excerpt #6:  Today’s financial planning software packages are incapable of modeling regime-based retirement projections – not because it’s impossible, or even difficult, to program, but simply because it’s not be programmed to do so. Hopefully that will change soon!

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

“Michael is a super-smart guy and a super-nice guy ”

So, is Michael Kitces going to jail, Rob?

I don’t think that Michael will be going to jail.

But it’s not me who decides the matter, Anonymous. It’s the millions of middle-class investors whose lives are in the process of being destroyed who will decide the matter.

If I were in Michael’s shoes, I would not play it in the way that he has played it. I would speak out a lot straighter and a lot stronger. Those millions of people are going to be very angry when they realize how they have been lied to. I wouldn’t be taking any chances. I would be calling the Buy-and-Holders out on their b.s. if I were in Michael’s shows.

Michael wants to tell the truth. That’s as clear as clear can be. He says a lot of things that others don’t say. I have a quote from him at the slider at the top of every page of this site. In that quote, he says; “There are time-periods where stocks are a terrible addition to that portfolio. Yet inexplicably we as planners STILL tend to suggest that it is risky not to own stocks when in reality the only risk is to our business.” That’s a pretty darn clear statement. It’s to Michael’s great credit that he has been willing to state things that clearly. Few in this field are willing to do so. In relative terms, Michael is an amazing straight-shooter.

To anyone paying attention, that statement does the job of warning people about the dangers of Buy-and-Hold. But you and I and Michael and Bogle and Shiller and everyone else know that for most of us, that doesn’t do the job. We all have a Get Rich Quick urge residing within us. We all want to live in a fantasy world where this might be the first time in history when a Buy-and-Hold strategy actually worked for one or two long-term investors in a galaxy far, far away from this one.

The phenomenon that Michael is pointing to in his statement is not so inexplicable as he suggests. There is a mountain of money to be made in this field by anyone willing to tell the Buy-and-Hold lies. Michael has seen lots of others raking in that easy money and naturally he wants to grab some of it himself. But he has a conscience. What to do, what to do? He shoots straight with that wonderful comment and thereby satisfies his conscience. And then he rationalizes not calling out Bogle and the other Wall Street Con Men on all the other lies that they put out on daily basis. So he makes good money and still is able to live with himself.

Not this boy, you know?

I don’t want to tell the Buy-and-Hold Lies. I don’t want to destroy the lives of the people who listen to what I have to say about stock investing. I don’t think I should have to. I don’t think Michael should have to either. Nor do I think that Shiller should have to do that. Or Bogle. Or you. Or anyone.

We are on the one-yard line, Anonymous. We have 34 years of peer-reviewed research showing that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind. I think that Michael Kitces could get away with being more honest than he has been a lot more often than he has been even somewhat honest. He could do more. If Michael Kitces tried being fully honest, I would back him up. And if Michael and I were both fully honest, Wade Pfau would join us. And then Rob Arnott would sign up. Then Shiller. Then Bogle. And on and on and on. There’s safety in numbers. And there will be even more money to be made promoting Valuation-Informed Indexing as there is promoting Buy-and-Hold today once this massive act of financial fraud has been widely exposed. All of us who long to do honest work in this field need to stick together to make our little  dream come true.

I am going to tell people after the next crash that Michael tried very hard to be honest. I am going to explain how he was willing to put his neck on the line to help out millions of middle-class investors like them. And I am going to tell them that Michael had good reason to be hesitant to be fully honest, that his fears that you Goons would destroy his career if he dared to take it one step further than he has were well-founded, that he had every reason to believe that you would follow through on your threats and that you have demonstrated in real life over and over again that you will stop at nothing to block people from learning the truth about this massive act of financial fraud. And that Bogle and lots of other big names in this field have made clear that they are 100 percent behind you in every criminal act in which you engage.

Will that get Michael off the hook?

I think so. Probably.

But also possibly not. I don’t know for certain. There has never before in U.S. history been an act of financial fraud this big. We are in uncharted territory.

It’s possible that some people will say that Michael is more to blame for this economic crisis than you Goons. He hasn’t done the evil things that you Goons have done. But you Goons are just internet Goons. People don’t expect much of you. Michael does this for a living. People have a right to expect more from him. His small and subtle dishonesties are arguably more damaging than your big and obvious ones. I am going to make a case for him. I am going to work it hard. I love Michael. But I cannot say with absolute certainty how things are going to go for him. It’s not for me to say. We are talking about a massive case of financial fraud here. There are going to be millions of people who are going to be very, very angry.

I am not Michael’s keeper. He is a grown-up. He is a professional. He has to take care of himself. I have urged him not to engage in any dishonesties whatsoever. He has elected to play it this other way. I am sure as heck not ever going to play it the way he has elected to play it. No way, no how. No can do. I can’t go for that. But Michael is his own person and he gets to decide how he plays it. That is as it should be, in my assessment.

Do you want to know what my bottom line on this is?

My bottom line is that Michael has been a fool to put himself in circumstances where these sorts of questions even need to be asked.

No one will be looking at any of Rob Bennett’s statements following the crash and wondering whether he will end up in a prison cell or not. I have been very clear how I feel about the massive act of financial fraud. I have THOUSANDS of statements in opposition to the criminal acts in the Post Archives. I hope to have lots more in the record before the crash comes. I am covered, Anonymous. If only one person on Planet Earth is covered, it’s me.

Good for me, you know?

I hope that Michael ends up being sufficiently covered. He’s a great guy, he’s a smart guy, he tries to be honest, I have learned a lot from him. I love the guy. But I can’t say that I don’t think that he had made a mistake by leaving himself at least somewhat open to charges that he participated in this massive act of financial fraud. I don’t think that will get him sent to prison. I am certain that it will do harm to his reputation.

Was it worth it?

In my mind, it wasn’t worth it. When I started writing about investing, I considered it 100 percent impossible that I would ever engage in deliberate deception on a matter relating to people’s retirements. I am 100 percent certain that the same was once true of Michael Kitces and Wade Pfau and Robert Shiller and Jack Bogle. Yet here we are. They let themselves be sucked in and here we are asking whether Michael Kitces — a great guy and a smart guy — will be going to prison following the next crash.

I sure hope not, you know? But it sure makes me sad that we even have to discuss the matter. And it sure makes me think that Micheal messed up in a big way somewhere down the line when he got on a pat that over time led him to being in circumstances where I cannot honestly give a definitive answer to the question.

We’ll see how it all turns out, Anonymous. I will be doing everything in my power to insure that as few of my Buy-and-Hold friends as possible end up in prison cells and that the prison terms of those who do are as short as possible given the circumstances that apply. Re that you have my pledge.

The rest is out of my hands.

My best and warmest wishes to you and yours, my old Goon friend.

Rob

Michael Kitces has written a fine article on Valuation-Informed Indexing and the New School of Safe-Withdrawal-Rate analysis. It is called Shiller CAPE Market Valuation: Terrible for Market Timing, But Valuable for Long-Term Retirement Planning.

Juicy Excerpt #1: Nonetheless, the reality is that while Shiller CAPE has little predictive value in the short term, its correlation to market returns is far stronger over longer time periods; Shiller CAPE shows its strongest correlation to nominal returns over an 8-year time horizon, and is actually most predictive of real returns over an *18* year time horizon… supporting Benjamin Graham’s old adage that the markets may be a voting machine in the short run, but they are ultimately a weighing machine in the long run as valuation eventually takes hold. On the other hand, over very long time horizons (e.g., 30 years) Shiller CAPE once again begins to lose its value as other longer-term structural market factors take hold.

Juicy Excerpt #2:  Prior research from the May 2008 issue of “The Kitces Report” has shown that Shiller CAPE ratios have an astonishingly strong -0.74 correlation to safe withdrawal rates and can help predict a reasonable starting point for retirement spending; because the long-term sustainability of retirement spending is most sensitive to an unfavorable sequence of returns in the first half of retirement, Shiller CAPE’s predictive value aligns quite well and helps to provide valuable insight about whether the prospective retiree faces an important headwind or tailwind in the early years of retirement. Notably, the results indicate Shiller CAPE is more correlated to safe withdrawal rates than it is to market returns themselves!

Juicy Excerpt #3: Perhaps this distinction between valuation’s long-run-but-not-short-run predictive value was the very reason the Nobel Prize committee gave its award jointly to Shiller for his work on how stock returns can be predicted in the long run, while simultaneously giving it to Eugene Fama for his efficient markets research showing that stock returns cannot be effectively predicted in the short run!

Rob’s Comment: Thanks for writing the fine article, Michael. It is important and brave stuff. I don’t agree when you suggest in the headline that P/E10 is not a good tool for long-term market timing. I certainly agree that short-term timing doesn’t work. But there is now 33 years of peer-reviewed research showing that long-term timing ALWAYS works and it is important for people to know that. I understand why you don’t want to say openly that long-term timing always works. It upsets Buy-and-Holders when they hear that. But that is the case and it is a very, very big deal. The research that I did with Wade Pfau shows that investors can reduce the risk of stock investing by nearly 70 percent by giving up on Buy-and-Hold strategies and engaging in long-term timing instead. That’s a very big deal indeed.