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Academic Researcher Wade Pfau: “This Issue Shouldn’t Really Even Be All That Controversial. It’s Just Common Sense That the Probabilities From the Trinity Study Shouldn’t Be Interpreted As Forward-Looking Probabilities for New Retirees.”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on May 17, 2011. Wade responded the next day.

He said: “It seems that the goons let the post by without too much complaint. Actually, this issue shouldn’t really even be all that controversial. It’s just common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees.” My response, sent the same day, is set forth below.

Wade:

I mean no personal criticism in saying this. You are in very good company. But you are missing the most important element of the story.

All overvaluation is the product of investor self-deception.

For stocks to be overvalued is for them to be mispriced. It is the market (investors) that sets the price. It can never be to our advantage to misprice stocks. So why do we do it?

When we misprice stocks, we are PRETENDING that our retirement accounts are worth more than they are.

OF COURSE it is common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees. Nothing could be more obvious. A six-year old child could see this.

So why don’t these highly educated, highly paid experts see it? Why have people been citing The 4 Percent Rule for years now?

Because it doesn’t PAY to see it. There’s more money to be made in pretending that we do not see the self-deception taking place. If we can fool people (and ourselves!) into thinking we don’t see it we escape the obligation of pointing it out.

The experts are every bit as much capable of self-deception as the investors are, Wade. So the experts have elected to pretend that it doesn’t matter whether the numbers we all use to plan our retirements add up or not. The term in the psychological literature for this phenomenon is “cognitive dissonance.”

When we overcome the cognitive dissonance, we all become able to MAKE USE of the wonderful research you and many others have done. Until that step is taken, discussions like those you engage in at the Bogleheads Forum go around and
around in circles. Nothing can be brought to a constructive resolution until there is a DESIRE to get the right answers. As of this moment the desire of most is to keep the cognitive dissonance going (because most have participated in it and suffer from it).

The job is to CHANGE that. The job is to get things to a place where we can all openly ACKNOWLEDGE that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees. We have known the realities in an intellectual sense for 30 years. We need to move to a place where they can be spoken out loud and the millions of middle-class investors who don’t have time to check these things out for themselves can properly depend on the community of experts to report the realities accurately and honestly and realistically.

This is the point I am making when I say that we need to permit honest posting on safe withdrawal rates and on many other important investment-related topics at every board and blog on the internet. That’s the entire ball of wax. There is not one investor alive who does not want to know how to invest effectively. Once we gain recognition of our right to post honestly, the whole thing  goes viral and we can bury Buy-and-Hold 30 feet in the ground where it can do no further harm to humans and other living things.

That’s when those fine studies of yours end up on the front page of the New York Times, where they belong!

And that’s when all the Buy-and-Holders receive the credit they merit for laying the foundation for the first data-based investing strategy that works in the real world!

The Goons didn’t do anything because the Goons grow weaker with each passing day. The problem with Get Rich Quick strategies is that they cause great human misery. As the misery of the Buy-and-Hold “strategy” spreads, the Goons run out of supporters. They don’t have arguments. So, when they run out of supporters, they are lost.

All of this has gone on in every earlier Bull/Bear cycle. What makes this  one different is that this is the first time that Post Archives are being kept of each word that is said and this is the first time that we are all able to watch it all play out before our eyes on our computer screens in real time.

Yes, it’s scary.

But it’s also exciting as heck to think what we will be able to do once we do gain recognition of that right to post honestly. You need to run the numbers, Wade. They won’t be calling it “the Dismal Science” after we gain the ability to report the numbers accurately. Instead of putting it to use to destroy millions of lives, we will be putting economics to use to ENHANCE millions of lives.

I have a funny hunch that it is to be involved in that sort of project that you got into this field in the first place. You just didn’t know it was going to be so contentious. Neither did I. Neither did any of the hundreds of others who have worked up the courage to speak up. We are all on the same side and we are all facing the same obstacles and we all are feeling the same hopes that the future will be a whole big bunch better than the recent past.

The words you put to your blog are top-notch stuff. They are extremely helpful. You have put forward tons of top-notch stuff that is extremely helpful. Please just keep at it. If you do, over time more and more of this will become clear to you. I took a sneak peak at the last page of the story before I dared to put up that May 13, 2002, post. I think it would be okay to let you know that the good guys win in the end.

The bad guys win too, actually. It’s just that in their case they have to be forced to accept the win over their kicking and screaming.

Humans!

Rob

Rob Bennett to Academic Researcher Wade Pfau, After the Greaney Goons Threatened to Get Him Fired From His Job: “The Site Is Owned by Greaney. It Was Set Up Solely for the Purpose of Intimidating People Like You”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on May 1, 2011. In the e-mail, I tried to offer words of comfort to my friend, who was living in fear that the Greaney Goons would follow through on their efforts to get him fired from his job because he had posted honestly on safe withdrawal rates. I knew from our earlier correspondence that Wade is married and has at least one small child (this came up during the time there was a concern over a possible nuclear meltdown in Japan because Wade had particular concerns about what might happen to his wife, who was pregnant at the time). I sent  a follow-up e-mail the next day. The text is set forth below.

Wade:

I reread your e-mail this morning and noticed something that might suggest a misperception that needs to be cleared up. You ask that I not delete the thread at the Hocomania site. I have no ability to delete threads there. That site is owned by Greaney. It was set up solely for the purpose of intimidating people like you, people who have expressed some interest in uncovering the realities of what the historical data says.

For example, there was a time when we had many people participating at Bogleheads who thought that valuations should be considered in calculations of the SWR. They would analyze each thread at the Hocomania board and discuss strategies for destroying people who had expressed the view that valuations should be considered. They would talk about defamatory things they could all agree to say over at Bogleheads to get people not to like that poster or things that they could say the poster had said that would help to get the poster banned or organize campaigns to send e-mails to Morningstar to demand a ban. If  a reporter wrote an article, they would send e-mails to the reporter’s boss to try to get him or her fired. There was a time when they called a poster’s place of work to try to get that poster fired. Mel Lindauer would then put a link up at Bogleheads so that everyone knew that the person who had said that valuations should be considered was being “punished”  and understood what would be in store for them if they elected to “cross” Lindauer or Greaney by posting honestly on investing topics.

This is why I often note that there is a Ban on Honest Posting on SWRs in effect at Bogleheads and many other sites today. This group uses Google searches to find out each day if there is anyone posting honestly about SWRs or other important investment-related topics and then sends their Goon Squads in to deal with the matter. As I said in the earlier  e-mail, this has been going on for nine years now. Given the huge legal liabilities they have run up, there is precisely zero chance that they will stop of their own accord, in my assessment.

I have no way of knowing precisely how much of the background of all this you know about. I have been presuming that, since you have seen Drip Guy’s behavior and Lindauer’s behavior, you had the general idea. Your comment about me
deleting a thread led me to believe that you might be thinking that I have some sort of ownership interest in that board. I have opposed the Campaign of Terror against our board communities going back to May 13, 2002. I put a post to Motley Fool demanding Greaney’s removal on November 23, 2002 (this was after he put up a post threatening to kill family members of any community members who posted honestly on the SWR matter). I post at that board only to correct the record to the extent I can and to answer questions that the Goons have (even the Goons would benefit from understanding the realities of stock investing and there have been rare cases where they have asked sincere questions). I have zero authority to delete threads at the Hocomania board.

The Bogleheads board at one time had a reputation for not encouraging lots of abusive posting. When the Goons showed up, a number of long-timers there asked where the Goon posters were coming from. I put up a post describing Greaney’s tactics and Lindauer’s role of linking to Greaney’s board each time a new poster dared to post honestly. I also contacted Morningstar about the matter and offered to send them e-mails each time Lindauer linked to the Greaney board. The Morningstar admins did not respond to the e-mail. Lindauer has said that “higher-ups” at Vanguard follow the board closely and know what goes on at it. The threatening threads were a daily occurrence during the years when I posted there. It was my May 13, 2002, post at Motley Fool that first noted the analytical errors in the Old School studies. So the Goons knew from my first post at Bogleheads that I would be posting honestly and started a smear campaign on the first day.

The Bogleheads board was launched for the purpose of blocking any possibility of honest posting. There had been numerous posters arguing that honest posting should be permitted back when the board was located at Morningstar.com. The smear campaigns caused many good people to leave but some soldiered on. The idea of moving to Bogleheads.org was to no longer have to operate under the Morningstar admins, who had not taken action in response to the smear campaigns but who had also not been wiling to ban those posting honestly, as the Lindauer and Greaney Goons demanded. Today they can of course ban anyone who comes to represent any sort of threat. So you no longer see discussions of whether honest posting on SWRs should be permitted or not.

I hope that background helps you make a little bit better sense of this. If ever there is a time when you have questions about the history, please don’t hesitate to ask. For good or for ill, I’ve had a front-row seat going back to the first day.

Rob

Academic Researcher Wade Pfau to Rob Bennett: “You Really Shouldn’t Have Posted My Private E-Mails. This Is So Unethical.”

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I have for several weeks been reporting at my blog on my 16-month e-mail correspondence with Academic Researcher Wade Pau. The most recent blog entry (posted this morning) was titled: Academic Researcher Wade Pfau (In Response to a Threat by the Greaney Goons to Get Him Fired From His Job for Posting Honestly on Safe Withdrawal Rates): “I Think I Should Stay Publicly Quiet for Awhile As I Really Don’t Want Anyone Sending Messages About Any Topics to Officials at My University.” Wade posted his reaction to the blog entry as a comment to it. His words are set forth below:

Rob,

After months of trying to prop yourself up at my expense, and showing such utter lack of personal integrity in posting the contents of my private emails when I explicitly asked you not to, you’ve finally gotten to your big payoff: the “proof that I’ve been threatened into silence.”

Let’s back up:

-As this whole email history reminds, I was always somewhat confused about your position. I now realize you believe that market valuations can be used to better identify a “safe withdrawal rate.” But I don’t think so. The U.S. experience has been rather unique, and the relationship between past market valuations and withdrawal rates in the U.S. is not necessarily indicative about future withdrawal rates. There is even less historical data to link valuations to safe withdrawal rates than there this is to simply look at what withdrawal rates worked in the past.

-The Trinity study came about as an offshoot of research by financial planners. But financial economists had long known there is no such thing as a safe withdrawal rate from a portfolio of volatile assets, well before the Trinity study was ever written. This means that you didn’t discover anything that wasn’t known before. It is dishonest for you to pull out all these 1.5 year old quotes from me and ignore what I’ve learned and said since then.

-Your blog post today refers to a heated exchange that DRiP Guy and I had at Bogleheads in April 2011. And do you recall what the outcome of that exchange was? That is when I realized that he was right about this whole matter. And so I did not write to the Trinity authors to ask for a correction, I wrote to apologize to them for being too publicly critical of their study, but to also point out some reasons why the limited U.S. historical data may not really be sufficient to have a clear idea about the safe withdrawal rate. I told you that before.

-I’ve said the Trinity study is not helpful for new retirees. You’ve said that this doesn’t go far enough because the study needs to be corrected. But what you really mean is: you want to become rich and famous and you think this will happen if there is a formal process to republish old studies acknowledging you for “discovering” an “error” in them and providing your proposed “correction.” Since you are wrong about the “error” and the “discovery” and the “correction,” I’m not sure how successful you are going to be with this plan.

-Now about this job threat business. You’ve accused DRiP Guy of calling my employer and all sorts of other oddities, but why don’t you just provide a link so that people can judge the accusation for themselves:

http://boards.fool.com/hocus-gets-college-prof-to-question-swr-studies-29265775.aspx?sort=whole

This was still a period of uncertainty about what would happen in Japan after the Great Kanto earthquake the month before, and a new president had also just been installed at my university indicating a shift in power away from the group that had hired me. So you have here what looks like your big triumph… proof I’ve been silenced. However, I quickly recovered from my initial concern and realized that the whole thing was ridiculous. Anyway, there is no threat there. intercst knows how to push your buttons. That’s all. I wouldn’t lose my job even if people did complain about me, and as far as I know, no one ever did email or call my employer. My research has not been impacted by any alleged threats, and it is really insulting and disgusting all of the times you’ve suggested otherwise. And I was still peeved that you misrepresented why I emailed the Trinity authors, which is what caused the whole issue in the first place.

-You owe Mr. Bengen an apology, because it does look like the 2000 retirees are going to be okay after all with 4%. We are getting far enough along in their retirements to see this. While that doesn’t mean that 4% was safe ex ante, it does mean that he did not cause millions of failed retirements, as you’ve explicitly suggested before.

-Finally, you shouldn’t have posted my private emails. That is so unethical. And it really doesn’t help to build you up. Posting my outdated private emails will only give second thoughts to anyone in the future who might have been willing to give you the benefit of the doubt.

I’m not going to get into a back and forth with you about this. I already know your response. You will be outraged. You will suggest that I’ve turned my back on average Americans and sold out to Wall Street. You will remind us all that you’ve been a victim of death threats. You will say that we could have discussions about all of these diverse viewpoints if only some internet discussion boards would be opened to honest posting. You will say that you discovered errors in the 4% rule and that those with a vested interest in preserving 4% have terrorized you for trying to get past studies corrected. As such, you will ignore everything I wrote above. You will just spin my comment as proof that I’m really afraid to speak truthfully. You will do this all in a very long series of comments which may approach 10,000 words in total. But it’s all so tiring and implausible. Please don’t spend your day doing this. Go play with your kids. It’s time to move on.

Academic Researcher Wade Pfau (In Response to a Threat by the Greaney Goons to Get Him Fired From His Job for Posting Honestly on Safe Withdrawal Rates): “I Think I Should Stay Publicly Quiet for Awhile As I Really Don’t Want Anyone Sending Messages About Any Topics to Officials at My University”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on April 5. 2011. I sent Wade an e-mail on April 18, 2011, reporting that The Returns Sequence Reality Checker had been released.

Wade said that the calculator looked great. He asked: “Have you been following the Trinity study thread at Bogleheads? DRiP Guy had a bit of a temper tantrum over the weekend” I responded that: “Things move forward at an exceedingly slow pace. But I did detect forward motion” in that thread.

Wade was during this time-period posting occasionally at my blog.  A number of articles were published in this time-period acknowledging ten years later that I was right in my May 13, 2002, post, that the Old School safe withdrawal rate studies really do get all the numbers wildly wrong because they do not include an adjustment for the valuation level that applies on the day the retirement begins. I wrote in a blog entry that the Old School studies should be corrected.  I explained that financial planners had been using the infamous “4 Percent Rule” for years and that millions of middle-class investors will be experiencing failed retirements in days to come and that we should all do everything possible to get the word out and help as many people as we can. Wade at first expressed reluctance to acknowledge the obvious merit of this idea. But, after some discussion, he agreed that the Old School studies should be corrected. He said that he would write an e-mail to the authors of the Trinity Study seeking a correction.

The Greaney Goons responded by putting forward posts at a thread at the Goon Central board threatening to get Wade fired from his job by sending defamatory comments to his employer. Wade sent me the following e-mail on May 1, 2011:

Hi Rob,

Thanks for the comments on my blog, and also your new article about the Fisher and Statman study is very nice.

I think I should stay publicly quiet for a while, as I really don’t want anyone sending messages about any topics to officials at my university.  They will not care about who is right or wrong, especially as they will not care about US retirement planning issues anyway, but they just don’t like any topic of controversy or problems. Hopefully this stuff will blow over soon and those guys will forget about it and move on to the next thing before any further escalation occurs.

But would you mind, at least for the next week or so, to not mention my name anymore on your blog, and to also completely ignore the “Wade Pfau Contacts Trinity Authors” thread at the Hocomania site.  I hope that thread can quickly move down the list into the archives.  At the same time, please do not delete it either, as that would surely be noticed by someone.

By the way, please do not mention this publicly, but just to let you know, I haven’t heard back from any of the Trinity authors yet.

Best wishes, Wade

“I Also Have a Problem with the ASSUMPTION (That’s All It Is) That Buy-and-Holders Will Stick With Their High Stock Allocations in the Face of Big Losses…I Have NEVER Seen Any Research Showing That Buy-and-Holders Have Been Able to Hold Through a Complete Bull/Bear Cycle”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on March 10, 2011. Wade sent his response later the same day.

Wade thanked me for the e-mail. He said: “I haven’t had a chance to read it carefully yet, but I will do that.”

He provided the following link:

http://ideas.repec.org/p/pra/mprapa/29448.html

He sent his next e-mail on March 16.  He said that he would be visiting Iowa for three weeks. He also said that his safe savings rate paper had been revised for the Journal of Financial Planning and that the discussion of the effect of valuations had been made “more explicit.” He reported that the article by Dan Moisand was out and that “he did indeed make the valuations link on his own.”

http://www.fa-mag.com/online-extras/7006-a-safe-retirement-savings-rate.html

He observed that: “That should make you happy.”

The e-mail also reported that the Fiser/Statman paper had been sent to a new journal, Applied Financial Economics.

Finally, Wade said that he hoped soon to have a rough draft of his “main valuations paper.” He explained: “It won’t be complete, but I hope it can be enough to at least post it online.”

I responded the same day. The text of my e-mail follows.

Wade:

I was a little worried about you after hearing some of the reports. I like to tell myself that there is some long-term good that can come out of just about any bad situation. But I have to acknowledge that it’s hard to imagine what that might be in this case.

I have been pretty darn effusive about your research, but I am afraid that I am not going to be able to top “erotically appealing.” I know when I’m whipped! [This was in reference to a comment about Wade’s research advanced at a span-bit site.]

The Moisand article is nicely done. I especially like it when he says that on repeat readings he mines new insights. That’s the sign of work that genuinely says something important and new.

You don’t need to rush re the calculator. You obviously have lots of other matters on your plate at the moment. I just want to at some point hear some feedback from someone who understands numbers a lot better than I do.

John Russell used to fill that role. My mind generates lots of ideas that sound great to me but that need to be grounded in the reality of a numbers check before being taken on the road. I think the Reality Checker is a big deal. But I need to be careful that I am not just talking myself into believing that.

Rob

Wade’s next e-mail came the following day. He said that he now realized that he would not be able to finish the two articles he was working on until after he took the CFA exam in June. He pointed me to two recent blog posts he had completed.

I responded later that day. The text of my e-mail follows.

Wade:

You are of course right to hold off until you can do things 100 percent properly. You are a workhorse in any event. It’s always the workhorses who worry whether they are working it quite hard enough!

The blog posts are of course stunning. I’ll link to them at my blog. I am going to hold off for a few weeks while I try to get caught up with entries relating to my columns. I have a big backlog today. I’ll be referencing the research in my columns too, of course. And I’ll be offering effusive quotes for inclusion in that New York Times article when it comes!

I’m glad that you addressed the Japan matter. I too have heard that question on occasion. I am reluctant to say anything about Japan because I don’t know hardly anything about the Japan market. But I like it that there is now research available to people who want to look into this.

I have two thoughts re possible follow-up research (by you or others) at some distant date.

I believe that the people who do not respond to these numbers with great enthusiasm are rationalizing. They are having a hard time making a paradigm shift (that’s how big this is). The job is to try to address the concerns that they feel, to the
extent that is possible.

One that comes up frequently is that people worry that, if they give themselves permission to “time the market,” they run the risk of making an allocation mistake. The thought here is that Buy-and-Hold is a neutral choice and any deviation from that is INHERENTLY risky regardless of what the numbers say.

My view is that there is nothing neutral about the Buy-and-Hold choice. It’s just a choice like any other. The aim should be to keep the risk profile constant and following a Buy-and-Hold strategy makes that a logical impossibility. So my view is that Buy-and-Hold is by definition a NON-neutral approach to asset allocation. But, strangely enough, there have been one or two who have not expressed 100 percent agreement with me re this one.

I think you did a fantastic job on the papers. You generally bend over backwards to be fair to the Buy-and-Hold perspective and that adds power to the presentation. Still, I think something can be said for being a bit more realistic (in my view!) and thereby making the numbers case even stronger.

The two things that I view as unrealistic (I don’t blame you for this, my sense is that you are proceeding pursuant to convention here) are: (1) using 6-month commercial paper as the non-stock choice; and (2) presuming that Buy-and-Holders will stick with their high stock allocations following big price drops.

I understand that it is tough to come up with a realistic and accepted number for the non-stock return. Still, I really do see a bias inherent in the convention of using 6-month commercial paper. I earn 3.5 percent real. Anyone following these strategies in the real world would have locked in such a rate when it was available.

I of course understand that that rate was not available at all earlier times. But it is hard for me to believe that there was ever a time when there wasn’t some non-stock option that offered a return better than 6-month commercial paper. Where did this convention come from? It’s not too hard to imagine that it was established by the people who backed Modern Portfolio Theory and all this sort of thing. Better numbers apply for the non-stock investor in the real world, whether the
research conventions that apply in this field permit us to formally acknowledge that this is so or not.

I also have a problem with the ASSUMPTION (that’s all it is) that Buy-and-Holders will stick with their high stock allocations in the face of big losses. The biggest reason why I like VII is that it makes it possible for the first time for middle-class people to stick with their allocation strategies (because the strategies are for the first time realistic and rational ones). I feel that it gives an unmerited benefit to the Buy-and-Hold strategy to suggest that many might stick to it. I have NEVER seen any research showing that Buy-and-Holders have been able to hold through a complete Bull/Bear cycle. So again I question this convention of the investment research field.

This was actually tested to a limited extent in the months following the first crash. Bill Bengen is an Old School SWR researcher. All his research in this field presumes that the investors following the recommended (Buy-and-Hold) strategy will stick with it following price drops. Guess what Bengen recommended for his clients following the crash? A zero percent stock allocation! (This when the P/E10 value was down to 12!)

Taylor Larimore, co-author of “The Bogleheads Guide to Investing” did something similar. He was asked a few months before the crash whether there were any circumstances in which he would lower his stock allocation. He said no, that would be unscientific. Following the crash, he said he was going to need to sell all his stocks so as not to imperil his retirement plan. Challenged as to how this idea fit with his advocacy of Buy-and-Hold, he explained that this was his “Plan B,” something he had in mind all along but never mentioned to anyone. Since it was the secret plan all along, it was 100 percent consistent with a Buy-and-Hold approach.

The problem with research in this field is that it does not take psychological realities into account. I understand that there are some good reasons for not doing that or for not doing too much of it. You run the risk of losing the objectivity that makes numbers-based research valuable in the first place. Still, my view is that investment research is going to need to move in this direction if it is to achieve its full potential for helping investors learn the realities. Psychological realities are real realities! Realities matter! They must be considered in efforts to come to a complete understanding of what is going on.

This is not your battle.I am not asking you to take on new battles. Perhaps it is better to play by the rules established by others until there is some softening in the opposition to consideration of new ideas or more acceptance of behavioral finance or whatever. I put these minor complaints forward for the purpose of stimulating thought as to possible approaches or implications or possibilities or whatever.

The bottom line is that your research is a huge advance and the findings are compelling EVEN THOUGH some dubious (at least in my mind) conventions that benefit the bad guys (I am joking here) are respected.

You deserve a month off to congratulate yourself over what you have accomplished. It’s too bad about that exam!

I wish that John could see what you have done. He would be thrilled.

Rob

Rob Bennett to Academic Researcher Wade Pfau: “Is It Not So That Your Results Challenge Fundamental Principles of Modern Portfolio Theory? You Show That an Investor Does Not Need to Take on Added Risk to Justify a Realistic Expectation of Added Return.”

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Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on March 10, 2011. My response, sent later the same day, is set forth below.

Wade:

The Fisher/Statman paper is stunning.

My personal view is that this may be the most important piece of investment research ever published. I don’t care that that sounds wildly overstated. My experience with these matters tells me this is so.

Is it not so that your results challenge fundamental principles of Modern Portfolio Theory? You show that an investor does not need to take on added risk to justify a realistic expectation of added return. It is possible to both increase return AND lower risk with the same act — moving to a valuation-informed strategy for setting one’s stock allocation. An entire book could be written exploring the many far-reaching theoretical and practical  implications of this finding. Even Shiller has not yet stated things in quite as compelling a manner as you state them in this paper, in my assessment.

You have an amazing work ethic. If I had produced one paper with the significance of the several you have churned out in recent days, I would need to take six months to come to terms with what I had done before feeling grounded enough to move forward again. You have been generating breakthrough research at a breakneck pace. I salute you!

The single thing that most excites me about the paper is the comparison of greatest portfolio value drops. In my eyes this is the best measure of risk. Small amounts of volatility can be endured. And volatility that is endured doesn’t matter in the long run. But crushing price drops cause investor bailouts. And none of the long-term returns that apply theoretically apply in the real world for investors who bail out. A price drop of over 60 percent is certainly going to cause a bailout in most cases. A price drop of 20 percent or so is a significant hit but in most cases would not cause a bailout. So I see this difference between the two approaches as being huge.

That’s very interesting about Japan. I have gotten a good number of questions about foreign markets myself over the years. I have zero knowledge about foreign markets. So I just say that I don’t know. It will be good to see some research on the question (although I will need to be much more cautious in my assessments of this kind of research because my knowledge base is so limited).

The Retirement Risk Evaluator was posted to my site in April 2007. John Walter Russell and I were co-developers (or co-authors if you prefer). John was a retired government systems engineer. He did all the research that appears today at the www.Early-Retirement-Planning-Insights.com site. He owned the site until his death in October 2009, at which point it passed to me. I have not added or deleted any material. I keep the site up so that people can see the research.

I am grateful for your acknowledgment in your paper of whatever help I have been able to offer you. I am pleased that you also acknowledged a good number of community members who participate at the Bogleheads board. That is appropriate and kind and helpful. There have been a few statements you have made there regarding me that I did not think were proper. But I of course understand that the “controversy” aspect of all this is an exceedingly delicate matter. You have done as good a job of walking the difficult line as anyone else and in some cases (as in your citing of both me and several Bogleheads Forum participants) I think you have pushed things a bit in the direction in which they need to go for a healing process to begin. That will end up being very important work if it ends up bearing good fruit. So your efforts in that direction are much appreciated.

I’m sorry to hear about the rejection and glad to hear about the acceptance at the Journal of Financial Planning. I’m always wondering what is going on in people’s heads when they make these decisions.  I puzzle over that one EVERY DAY.

I have three new things going on.

One is that I have just begun posting at www.Quora.com. It’s a question- and-answer site of considerable potential. It has attracted a more intelligent group of participants than earlier Q&A sites. I had big hopes for the Google Knol site a year ago because that site took a more intelligent approach to things and I hoped to be able to avoid the harassment and abusiveness that has held us back at so many lowest-common-denominator sites. Google has abandoned Knol (without shutting it down). So I have given up on that. But I am hopeful that Quora may over time come to permit these ideas to get a wider hearing. I’ll have to see what the reaction is when I post more.

Two, I am working with two marketing people to develop some products (CD sets and this sort of thing) getting these ideas out to people. The thought there is that I might be able to offer personal finance bloggers a cut of the profits for helping to sell the products to their readers. One big edge that Buy-and-Hold has going for it is that people make money from it. If I can find a way to make VII a money maker, I think I may be able to open some minds (I don’t mean that cynically, I am making a serious point here — people will listen more carefully to a new idea if they see profit potential in it).

Three, I have made a request to speak at a personal finance bloggers convention that has been scheduled for the weekend of October 1 in Chicago. Some of the big players will be there. Getting just one or two of the big players on my side would help deal with the blacklisting and bans that apply at many blogs today. I have seen a far more positive reaction among bloggers in the past six months than I had ever seen at earlier times. There are today several places where I can put up honest and uncompromised Guest Blog Entries. The next step is to get one of the heavy hitters to himself either endorse the ideas or say that there is enough merit in them that people should be talking about them.

Rob

Academic Researcher Wade Pfau Was Dejected When the Editors of a Journal Rejected his Maximum Withdrawal Rate Research on Grounds that “They Just Don’t Like the Whole Literature About 4 Percent Rules. They Think That William Sharpe Already Solved This With His 2009 Paper.”

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Yesterday’s blog entry reported on an e-mail that Academic Researcher Wade Pfau sent me on March 4, 2011. I next received an e-mail from Wade on March 10, 2011.

Wade said that he had now done research on how Valuation-Informed Indexing worked in Japan and that it showed that “Valuation-Informed Indexing worked fine in Japan as well.” He commented: “This was the big test, as valuations took a wild ride there” (Wade explained that the P/E10 level rose to nearly 100 by the start of 1990. He noted that several Bogleheads had brought up Japan in his discussions with them.

He sent me an advance copy of his paper on the Fisher and Statman research.

He asked for me to let him know the year that The Retirement Risk Evaluator was published so that he could provide citations to it in his research. He also asked whether I should be referred to as the sole creator of the calculator or as a co-creator with John Walter Russell.

He said that he had heard from the Journal of Financial Planning that it would be publishing a safe savings rate paper.

He also reported on a discouraging reaction to his maximum-withdrawal-rate research from another journal. Wade said: “The referee comments left me a bit dejected.” He explained that the editors did not object to the valuations component of the research but “they just don’t like the whole literature about 4 percent rules.” He added: “They think that William Sharpe already solved this with his 2009 paper, though I don’t know what the solution is. “

Academic Researcher Wade Pfau Sent Financial Columnist Scott Burns (Who Popularized the Infamous 4 Percent Rule for Retirement Planning) Several of His New School SWR Research Papers and Received Polite Brushoffs in Return

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on March 4, 2011. Wade responded later the same day.

He said that he thought that Scott Burns would be interested in the New School safe withdrawal rate research since “I  think he is the one personally responsible for making the Trinity study famous.” He explained that, “since he and the authors live in Texas, maybe they know each other.  Otherwise, no one would have heard of the Trinity study.  It is in a very obscure journal.”

Wade said that he had sent Scott several of his research papers and received polite brushoffs in return. According to the e-mail: “He does kindly respond, but then that is the end of it.”  Wade quoted Scott as saying of one of Wade’s research papers: “”Thanks for sending this. I will read it with great interest.”

Wade sent a separate e-mail to me that day correcting a tweet that I had posted to the Twitter.com service. Mel Lindauer, co-author of the Bogleheads Guide to Investing, had become hostile when Wade posted research to the Bogleheads Forum showing that Valuation-Informed Indexing has provided higher long-term returns than Buy-and-Hold throughout the historical record at greatly reduced risk. I posted a tweet on the exchange incorrectly saying that Mel had accused Wade of “Back-Testing.” He had in fact accused him of “Data-Mining.”

I responded the same day. I said: “Thanks for letting me know. You are of course correct. That is now fixed.”

Wade responded by saying: “I figured it was a typo, but that is the type of thing that DRiP Guy likes to jump on you about.”

Academic Researcher Wade Pfau: “I’m Not Sure Whether Criticisms of Your Calculators Have Merit or Not. I Can’t Really Take Anything Drip Guy Says at Face Value”

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Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on March 2, 2011. My response, sent later the same day, is set forth below.

Wade:

That all sounds super.

I’ll mention something that I’ve been working on for a long time and that I think is important and that I think you were touching on in some of your posts on the Bogleheads thread re SWRs.

I believe that there is an element of this that is random — the nature of the particular returns sequence through which reversion to the mean is achieved. Those who used the 4 percent rule for retirements beginning in 1996 were doing something risky — but after 10 years passed without a crash, they entered safe territory. It is only retirements that experience a crash within the first 10 years that fail. No one knew in advance what sort of return sequence was going to turn up. But we saw a lucky one for the 1996 through 2006 period and those retirees are now okay.

This throws lots of people. People look at the fact that a retirement that began when the P/E10 was 33 (1929) survived with a 4 percent withdrawal and conclude that a 4 percent withdrawal is safe even at times of insanely high valuations. No! If you look at the returns sequence that occurred from 1929 through 1939, you see that it was a bit more favorable for retirees than most we have seen in the record.

People have a hard time accepting that because the results were so poor. But the results were not poor because there was a bad returns sequence. Results were poor because valuations were insane. The somewhat lucky returns sequence saved an extremely dangerous situation from turning out worse than it did.

I believe that it would be a huge help to be able to characterize what constitutes a good returns sequence for different types of investors (what is good for retirees is not the same as what is good for young investors). John and I were working at the time he died on a calculator (“The Returns-Sequence Reality Checker”) that would permit people to plug in returns sequences (either ones we have seen in the historical record or made-up ones that they want to test) and see what sorts of results they produce over different time-periods (the 30-year results are of course affected by the starting-point valuation level of the time-period examined).

I have put the project on hold for a long time. I am thinking that I need to get back to work on it because it is looking more and more important as things move forward. My problem has been that I cannot handle the numbers side work on my own.

I found a fellow (Sam) who helped me develop a prototype (it’s not finished but I believe he is willing to finish it if I ask). The guy is a totally great guy. But I have been reluctant to take on the cost of putting it in calculator form because I cannot be sure of all his formulas (he’s certainly trying to do it right but I am not sure that he always understands the questions that I am asking — I am a numbers dunce and I speak a different language). John knew me well enough that we got to a point where we could figure each other out. That gave me the confidence to put calculators at my site even though I do not understand the formulas (but only the concepts) that drive them.

If you are willing, I would like to finish the prototype with Sam and then have you review it to see if it really does what it is supposed to do and names sense. If you gave a sign-off, I would be comfortable spending the money to have it done as an actual calculator (the prototype would be an Excel spreadsheet).

I don’t want to take you away from your other work and I of course understand if this is something that you do not want to get involved in. But it might spark some thoughts on your side too. If you tell me that you would be willing to take a look at this, I would redouble my efforts to see if Sam and I could finish the prototype. I can show you the unfinished prototype now if you feel that that would give you a better idea of the concept being explored here.

Rob

Wade responded the same day.

In reference to my discussion of how our inability to know in advance what sort of return sequence will turn up adds an element of randomness to the analysis, he said: “I agree with this, though I know you have not been popular when you
say it.  This is similar to your drunk driving analogy, which I agree with.”

Wade referred me to a paper titled “Will 2000-Era Retirees Experience the Worst Retirement Outcomes in U.S. History? A Progress Report after 10 Years.”

http://ideas.repec.org/p/pra/mprapa/27107.html

He said that he would be happy to look at the prototype for the Returns Sequence Reality Checker. His e-mail states: “I’d been meaning to look more at your calculators, but just haven’t gotten around to it yet.  I know people accuse you of using imaginary numbers, but to me that sounds like the definition of Monte Carlo simulations.  So I’m not sure whether criticisms of your calculators have merit or not.  I can’t really take anything DRiP Guy says at face value.”

Finally, he reported that Dan Moisand was writing an article about Wade’s research on safe saving rates. He described Dan as an influential financial planner who had served as a past president of the Financial Planning Association. “So getting his approach about this is definitely a step in the right direction.”

Academic Researcher Wade Pfau: “Valuation-Informed Indexing Always Provides More Returns for Often Less Risk”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on March 1, 2011. He sent his response later that day.

Wade said that he shared my view that using 30-year rolling time-periods to make the case for Valuation-Informed Indexing was “compelling” and that “I’m definitely going to be using tables like the one I showed at Bogleheads with all the risk measures.” He explained that: “My idea is to show many different tables with results over the whole period for returns and risks.  Valuation-Informed Indexing always provides more returns for often less risk.” Wade’s e-mail continued: “I also want to read more about the “information ratio” measure, as I think it may be the most important of all the measures in that table. But I need to better explain its full power.”

He stated: ” I will pick some of the cases where VII did least well and show the 30-year rolling periods for those.  This is to help avoid data mining.  But the fact will remain that no matter what I try, VII will still perform better in 85-95% of cases for 30 years, and the times that it does worse are those in which buy and hold was doing its best in history (which is always right around the peak of the bubble in 2000), and so VII is not more risky.  I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years.  I think it is all quite persuasive.”