A Rich Life

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

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: “I Would Not Be Surprised If the Market Timer Had to Go All the Way to 200/0 to Get a Strategy With the Same Risk as 100 Percent Stocks”

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Yesterday’s blog entry reported on two e-mails that I sent to Academic Researcher Wade Pfau on March 1, 2011. Wade sent his response the same day.

He said: “I think having that debate with Mel helped me to clarify some stuff in my mind, which I can more or less copy and paste into my paper after making some adjustments so that it sounds more “academic.”

In response to my suggestion that he consider looking at hypothetical portfolios that employed stock allocations of greater than 100 percent at times of low valuations, he said that this would not be difficult to do and that he would plan to do it in a future paper but not in the one he was preparing at the time. Wade told me that, based on the analysis of the historical data that he had been doing, “I would not be surprised if the market timer had to go all the way to 200/0 to get a strategy  with the same risk as 100% stocks.”

He added that: “The fact that you should only compare risk-adjusted returns is very basic in finance.  Academically, it is clear in Markowitz’s work from the 1950s.  But no one was acknowledging that they agree about this.”

I sent my response the next day. The text is set forth below.

Wade:

In the main paper, will you be able to use some of the tools you referred to in the Bogleheads post? I am referring to the risk-oriented ones (for example, the one that said the highest drop experienced for 100 percent stocks was x and the highest
drop experienced for 100/0 stocks was y)?

If you are able to do that, it would make me very happy. The discussion over whether that matters or not goes back to the very first day — May 13, 2002. I have been saying that VII must bring better numbers (I said this long before anyone knew what the numbers were — I’ve never viewed the numbers as being anything more than CONFIRMATION of what common sense tells us must be so) but I also have made a totally separate argument — that the numbers shown for VII are realistic while the numbers shown for Buy/Hold are not  because there are probably only a tiny number of investors in history who have stuck to Buy/Hold through an entire Bull/Bear cycle (at the moment of biggest loss from 1929 forward, the real loss was 80 percent real — it’s a rare individual who could stick with a high stock allocation through that).

John Walter Russell provided huge help in showing that the numbers for VII are better than for Buy/Hold (although I think your rolling 30-year period showing is more compelling). But I was either never able to explain the other point successfully to John or he was not familiar enough with the tools needed to make the point effectively (he was a systems engineer). He tried a few things but our efforts on this second point never produced much usable material. My focus has always been on the emotions side rather than the numbers side. So in my mind this is actually the bigger point (I have generally given up putting it forward largely because I have not been able to find statistical support for it and in this field that often seems to be the only sort of evidence that “counts”).

I would love to see more support for that point (I am certainly not trying to push here, I am just saying that I would be grateful to see it if there comes a day when it is something that can be provided).

There was an amazing conversation I once had with John Greaney, the Supreme Leader of the Goons, back at the Motley Fool board. The largest real loss in the record is 80 percent. John retired at age 41 and used his Old School SWR study to plan his early retirement. He retired with about $500,000 (that went to about $3 million during the bull years). I asked him what he would have done if, in the first three years of his retirement, the value of his portfolio had fallen to something not much above $100,000 (he goes with a 90 percent stock allocation). He said that he would have just stick with his 90 percent stock allocation because his SWR study proves that his plan cannot fail (that stocks would turn around and he would make all the money back plus a lot more).

My response (this was early 2003) was: “I’m going to take a brief Screaming Break now, everyone. I’ll be back in a little while.” I am certain that there were others in the room who agreed with me. But no one else dared to speak up.

Rob

Academic Researcher Wade Pfau: “Perhaps It Is a Good Thing That I Am Not Really a Finance Professor. I Don’t Personally Know So Many Finance People, So I Don’t Feel the Taboo.””

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. After doing research showing the huge advance that Valuation-Informed Indexing represents over Buy-and-Hold, Wade had expressed amazement that no one had done similar research before him. I offered two explanations: (1) The Social Taboo Against Pointing Out Flaws in Buy-and-Hold; and (2) Cognitive Dissonance.

In reaction to my first explanation, Wade said: “Perhaps it is good that I am not really a finance professor.  I’m just an economics professor who dabbles in finance.  I don’t personally know so many finance people, so I don’t feel the taboo. We’ll see if I can ever get these articles published in purely academic finance journals though.  I think I will try that first.”

In reaction to my second explanation (cognitive dissonance), Wade said: “Yes, this makes sense.”

I sent my response later the same day. The text is set forth below.

Wade:

I agree with your point about the Social Taboo. People get angry with the suggestion implicit in all I do that I know more about stock investing than most “experts” in the field. I do not have a higher I.Q. My edge is that I did not spend decades learning all the wrong beliefs. I’m just looking for what works. That’s a huge edge at a time when the fundamental premise of the dominant theory has been shown to be in error.

The difference between the two groups (those who have a professional stake in Buy-and-Hold and those who do not) can be seen in the Post Archives going back to the first day. There was HUGE interest in exploring the realities going all the way back to May 2002. Hundreds of people at Motley Fool said this was the most exciting discussion we had ever had. The trouble was that those with a professional interest in shutting down the discussions (if you can call a desire not to correct a study or calculator posted at an internet site a “professional” interest) are 50 times more intense in their desire to shut down the discussions than are most investors intense in their desire to learn the realities of stock investing. The positive desire is a casual one, the “professional” desire is felt as a life-or-death thing. That causes a HUGE imbalance in how the two groups respond to continued efforts to discuss the realities that are met with brutally abusive efforts to block those efforts.

I’m glad that you understand the cognitive dissonance point. The biggest problem I have is that, when I point out an error which is pretty darn obvious (there is nothing a tiny bit surprising in the claim that the price you pay for stocks affects the value proposition you obtain from them) and note that the error was publicly revealed by research done by Shiller 30 years ago, what people HEAR is that I am charging everyone who has advocated Buy-and-Hold with ethical corruption.

I am not doing that.

There has been ethical corruption with the tolerance of the defamation and death threats and internet harassment and this sort of thing. But advocacy of Buy-and-Hold is not evidence of corruption. Advocacy of Buy-and-Hold is just a MISTAKE, something very different. But my case is so clear and convincing and obvious that people cannot bear to let it in. It SOUNDS like I am suggesting massive corruption. The alternative explanation — the most widespread case of cognitive dissonance ever encountered on Planet Earth — is a highly counter-intuitive reality.

Rob

Academic Researcher Wade Pfau: “You Deserve Much of the Credit [For My Research Findings] As the Whole Idea of Valuation-Informed Indexing Belongs to You”

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Wednesday’s blog entry reported on an e-mail that academic researcher Wade Blog sent to me on January 20, 2011. The text of my response is set forth below:

Wade:

I just saw the entry at your blog. It’s stunning. It’s so good and raises so much promise that it scares me to let in the words put forward there. It’s going to take some time for the full impact to hit.

I hope that this is the thing that opens the door (my heart has been crushed re this matter many times in the past). If it is, or if it loosens the door enough so that someone else is able to swing it open with one more further little push, we are going to see some amazing things in days to come.

You obviously get it re valuations. But my experience with this is that, the deeper you go with it, the more you learn; the potential here is truly beyond belief — we are on the threshold of the development of a new and improved free market economic system (if people are able to learn about the effects of valuations, significant levels of overvaluation become a logical impossibility, which means that the economic crises that follow from times of extreme overvaluation are avoided).

I’ve had the strange experience for nine years now of seeing both the most wonderful things I have ever seen and the most awful things I have ever seen combined in the same grand debate. I sure would like to see forces set in motion that let the good stuff become dominant and the bad stuff to be pushed into a far-off corner.

My deep thanks for the breakthrough and inspiring work you have put forward. You’ve helped many, many people.

Rob

Wade responded later the same day. He thanked me for my comments and said: “Of course you deserve much of the credit as the whole idea of Valuation-Informed Indexing belongs to you.” He added that Stein and DeMuth have examined similar ideas but noted that ” they were too caught up in that 100% stocks /100% bills idea for it to be useful for long-term conservative investors.  You are the one who laid out strategies like 30-60-90 that will be the basis for all my simulations.”

Wade asked: “Do you mind if I call the paper “Valuation-Informed Indexing”?  I thought that would be the best name for it, and of course I would credit you as the originator of the term.” His e-mail stated: I have been toying with the idea of sending the paper to the Journal of Finance, which is the most prestigious journal in academic finance. There is a high chance that they will reject the paper for publication, but I think it is worth a shot.  At any rate, I am hopeful that the eventual paper can be published in a good academic or practitioner journal, and that will help bring more recognition for these ideas.  If it is in a good journal, Robert Shiller might even read it.”

“I Definitely Need to Cite [You] as the Founder of Valuation-Informed Indexing…. Shiller Pointed Out the Predictive Power of P/E10 But Never Discussed How to Incorporate It Into Asset Allocation.”

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Yesterday’s blog reported on an e-mail that I sent to academic research Wade Pfau on January 16, 2011. Wade responded later the same day. He endorsed John Walter Russell’s characterization of a paper purporting to show that long-term timing does not work as testing “idiot switching.” He said: ” ‘Idiot switching.’  That is great, and describes exactly what the Fisher and Statman paper does.  You and John have a great knack for coining new terms.  I think VII is a much better term than any alternatives I’ve come across.” He added that he did not think it would be appropriate to use the term “idiot switching” in an academic paper.

Wade also reported that “as always, I will be reading all your links.” He said: “I definitely need to cite some of your work as the founder of VII, as I have not found anyone else who can lay claim to that.  Shiller pointed out the predictive power of PE10 but never discussed how to incorporate it into asset allocation, as far as I know.”

 

“This Is the Paper That Prompted John Walter Russell to Coin the Term ‘Idiot Switching’ “

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Yesterday’s blog entry reported on an e-mail sent to me on January 16, 2011, by academic research Wade Pfau. Set forth below are the texts of my three response e-mails.

Wade:

It’s always nice to hear from you. I am doing fine. Thanks for your kind comments re the podcast. I haven’t looked at the linked paper but I will look at it shortly.

Please ask any questions that happen to come up. I may or may not be able to help with them. If I am not, you will be helping me by leading me to discover holes in my thinking. That’s obviously important.

Your interest in the general subject encourages me. As you know, I have been walking this path for a long time. I was pulled onto it not out of a personal desire but as the result of a strange set of circumstances. As I continued down the path, I discovered more and more tentative findings that seem to me to offer great promise. So I have not been able to give up the effort either to disprove or affirm the basic concept.

In ordinary circumstances, this would be easy to do. But my experience has been that even many smart and good people do not want to look too closely even at tentative findings that suggest follow-up findings so far removed from the conventional wisdom of our day. So I have been frustrated in my effort either to convince myself that the ideas are not worth pursuing or to convince enough others that they represent genuine advances  to get them the attention that they merit in the event that they are sound.

Any work you are able to do re these ideas will obviously help move the ball forward a bit. So I am happy that you are evidencing a good bit of interest. I will always be happy to help in any way I can whether that means that the ideas become better known or that they become discredited. The important thing is that the ideas either be advanced or killed based on the extent to which they do a good job of describing the realities.

Please take whatever time you need before moving to the next step in your explorations. It is clearly more important to get each step right than to move through many steps at a quick pace.

Thanks for bringing a measure of cheer and optimism to my Sunday morning!

Rob

Wade:

I pulled up the paper.

I only took a quick look because I recall that one coming up in a discussion that was held at the Vanguard Diehards board at the time the paper was published. My recollection is that this is the paper that prompted John Walter Russell to coin the term “idiot switching.” I haven’t spent enough time with the paper to refresh my memory re their methodology but my recollection is that they did not do things in the way in which someone trying to make the strategy work would do things. The put the non-stock money in unnecessarily low-earning asset classes and I believe that they often made extreme shifts (from very low stock allocations to very high stock allocations) in response to modest P/E10 changes (I am not even sure if they always used P/E10 — it may be that they were using P/E1, which is far less reliable). I recall not being impressed by that paper when it came out.

Rob

Wade:

I have two articles at my site that link to studies on the VII topic. As a journalist, I follow a broad interpretation of the word “study” (I am open to using anything that effectively makes the point). So it may be that these two articles will not be of value to you. But it is possible that one of the links or one of the excepts will lead you to something of use. So I thought I would pass these along.

http://www.passionsaving.com/buy-and-hold-is-dead-part-one.html

http://www.passionsaving.com/buy-and-hold-is-dead-part-two.html

Also, here is an article linking to 20 quotes that I collected making the essential point. I think it makes a compelling case to read all these comments in one place:

http://www.passionsaving.com/buy-and-hold-investing.html

Rob

Academic Researcher Wade Pfau: “As You Say in Your Podcast, Valuation-Informed Indexing Should Beat Buy-and-Hold About 90 Percent of the Time, and I Am Getting Results That Support This”

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I received an e-mail from academic researcher Wade Pfau with the title “Valuation-Informed Indexing” on January 16 2011. Wade told me that he had listened two times to the RobCast in which I outline nine possible Valuation-Informed-Indexing portfolio allocation strategies and characterized it as “excellent.” He said: “I wrote up the programs to test your VII strategies against buy-and-hold, and I must say that the results look very promising…. I am quite excited about the findings so far.  As you say in the podcast, VII should beat buy and hold about 90 percent of the time, and I am getting results that support this for various strategies.”

Wade wrote that he had only been able to find one paper in the literature “which tests something even remotely close to Valuation-Informed Indexing.” This was a paper by Kenneth L. Fisher and Meir Statman titled “Market Timing in Regressions and Reality.” Here is a link:

http://ww.scu.edu/business/finance/research/upload/mkt-timing-in-regression-and-reality-2.pdf

Wade said that he would be criticizing the paper in one of his own forthcoming research papers.

He concluded by saying: ” I hope to have a finished paper in a month or so.  I think I may need to ask you a few questions before finishing, but I still have to work my way through all the materials you already sent me.”

Wade Pfau: “I Was a Little Nervous About Contacting You, In Case You Thought I Was Trying to Steal Your Thunder”

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Yesterday’s blog entry reported on an e-mail that I sent to academic researcher Wade Pfau on December 21, 2010. Wade was visiting family for the holidays at that time. So that series of e-mails came to an end. The topics discussed in it were picked up in subsequent e-mail discussions.

One separate discussion grew out of some matters brought up in the discussion thread referred to above. The focus of this discussion was a research paper that Wade prepared on safe withdrawal rates. Set forth below is the text of an e-mail that I sent to Wade on December 16, 2010, relating to his safe withdrawal rate research.

Wade:

That’s super! Thanks so much for letting me know.
I skimmed the paper before writing to you. I will read it more carefully perhaps tomorrow (I have a few deadlines facing me today). I’m excited to see this. I am so glad that you let me know about it.
I am going to post your comment as today’s post to my “A Rich Life” blog. I’d love to see more people doing this sort of thing.
I’d be grateful if you would let me know when the article is published. It’s of course my belief that this is important stuff and we need to see lots more good and smart people advancing the ball in the way in which you have with this work.
Rob
Wade responded the same day. He said: “I was a little nervous about contacting you, in case you thought I was trying to steal your thunder.  I did try to properly cite your contributions.  I’m glad to see your positive response.”
Wade asked how he should cite the work John and I did together during the time we were developing The Retirement Risk Evaluator, in particular a post by John in which he described his approach on confidence limits. He observed that: “You’ve written so much that I’m afraid I’ve only read a small sample of it all” and urged me to identify some of my writings that would be of particular benefit to him.
He provided me links to two research articles he had written on safe withdrawal rates.

Wade Pfau: “I Like Your Term ‘Historical Surviving Withdrawal Rate’ As a More Accurate Description of What Traditional Studies Like Trinity Show”

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Yesterday’s blog entry set forth the text of an e-mail that I sent to academic researcher Wade Pfau on December 18, 2010. Wade responded later the same day.

He said that he agreed with my comment re the Business Week article that safe withdrawal rates can rise a good bit higher than 4 percent as well as drop a good bit below 4 percent. However, he argued that the SWR was likely to remain low for some time and thus maintained that “perhaps it is not a major oversight on the author’s part.”

Wade noted that I had moved from my work on SWRS to examining the effect of valuations on allocations and expected returns and said that he expected to do research in that area within the next year. He observed that “I do like your term ‘Historical Surviving Withdrawal Rate’ as a more accurate description of what traditional studies like Trinity show.” He noted that he remembered me using that term in my posts at the Vanguard Diehards board.

Finally, Wade observed that the thread he started on safe withdrawal rates generated far fewer posts than threads he started on two earlier research papers. “It’s interesting to see the difference,” he said.

The text of my response e-mail follows:

Wade:

Yes, all that is so. The initial SWR discussions were strange in that some reacted with great excitement and some with a great determination to shut down the discussions. My focus then turned to figuring out what was behind that. And that led to all sorts of explorations of all sorts of valuations-related topics.

I ultimately concluded that the confusion stems from the fact that Fama’s model (the Efficient Market Theory) starts from premises that are the opposite of those in Shiller’s model (Valuation-Informed Indexing — the title is mine but the core ideas are Shiller’s). I write a weekly column called “Valuation-Informed Indexing” at the ValueWalk.com site that aims to point out all the differences between the old model and the new model. The column is aimed at better-informed investors
(the type of people who practice Value Investing tend to be well informed, in my assessment) rather than at the typical middle-class investors to whom I direct most of my writings. I first wrote eight articles describing each of the four calculators that John and I developed together, and then added so far 20 weekly columns. Here is a link to the archives:

http://www.valuewalk.com/category/valuation-informed-indexing/

If I were going to pick out one column entry to illustrate the basic idea being explored, I think it would be this one (“Either Valuations Matter Not at All or They Matter A Great Deal Indeed”):

http://www.valuewalk.com/asset-allocation/ivaluationinformed-indexingibr-valuations-matter-matter-great-deal/

The best comment that has been made on my work was a comment by Columbia University Economist Rajiv Sethi, who said: “Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy
than passive investing over long horizons (ten years or more). I am not in a position to evaluate this empirically but it is consistent with Shiller’s analysis and I can see how it could be true.”

That statement hits it on the head. It would be dogmatic for me to say that everyone must agree with me. I do NOT say that. What I say is that pretty much everything I say follows from what Shiller says in his book “Irrational Exuberance.” The subtitle of the book is: “The National Bestseller that REVOLUTIONIZED the Way We Think About the Market.” Shiller is making a declaration that he REJECTS the conventional model (the Efficient Market Theory, or Buy-and-Hold).

People have been trying to have it both ways now for 30 years. They advocate Buy-and-Hold and they also say that valuations matter. If valuations matter, Buy-and-Hold is dangerous. If the market is efficient, valuations don’t matter and Buy-and-Hold is the ideal strategy. It’s an either-or. I don’t mind people saying that they reject Shiller and thus they reject all that I say. That makes logical sense. But, if Shiller is right, there are all sorts of implications that follow from his revolutionary work. The strange thing is that, while Shiller’s work is well regarded, neither Shiller not anyone else has explored the strategic implications of his findings. Doing that has become my Life Project for the past eight years.

I’d like to illustrate how someone following the VII model would respond to your finding that the predicted withdrawal rate in 2008 was 1.48 percent. Drip Guy obviously saw this as a BAD thing, almost a catastrophically bad thing. The Valuation-Informed Indexer does not see it that way. It is just a data point that provides guidance on how best to invest. A low SWR is neither a good thing nor a bad thing. It is a neutral reality.

In 2000, the SWR for TIPS was 5.8 percent. That is an amazing SWR for a risk-free asset class. All that retirees had to do was to move their money into TIPS and they could retire with great safety. The problem is that this option was rarely recommended because under the Buy-and-Hold Model it is a logical impossibility. Buy-and-Hold posits that the higher returns associated with stocks are the result of the greater risk associated with stocks. So a risk-free asset class can never be expected to provide higher long-term returns than stocks. VII rejects this way of thinking about things. So Valuation-Informed Indexers are free to consider asset classes offering far better value propositions than stocks and thereby to solve the problem presented when the SWR for stocks is very low.

The SWR for TIPS is obviously lower today. But an argument can be made that TIPS offer an even better deal today than they did in 2000. Why? Because the P/E10 for stocks is on its way to 7 or 8 (we have gone to 7 or 8 in the wake of every trip to 25 or above — bull markets always cause enough economic destruction to bring valuations to half of fair value). When the P/E10 for stocks is 7 or 8, the most likely annualized 10-year return for stocks is 15 percent real. So money put in TIPS today will not earn only the amount provided directly through ownership of TIPS. It will earn that amount for a few years and then it will earn the far higher return available for stocks selling at a P/E10 of 7 or 8. The long-term return on that money will be a combination of the amounts earned on the TIPS and the amounts earned on the stocks once the stocks are priced well. Again, the low SWR for stocks today presents no problem. That is a temporary reality than can easily be avoided by moving assets to asset classes offering a more appealing long-term value proposition.

You say that it’s not too big a deal that the article doesn’t mention that the SWR will someday go up much higher than 4 percent. I of course  am glad to see any article that points out that the SWR is sometimes a good bit lower than 4 percent. But I also think that the strategic point is a very important one. VII is a LONG-TERM investment strategy. All strategies are based on the idea that investors need to plan ahead. It is also an emotionally BALANCED strategy. It treats all price changes as having both positive and negative aspects. The same thing that causes low SWRs (high valuations) also causes crashes, which cause low valuations, which cause high SWRs. There is no such thing as a permanently low SWR. People don’t need to be concerned about low SWRs so long as they know how to respond strategically to take advantage of them in the long run.

The problem is that Buy-and-Hold does not permit consideration of the idea that super-safe asset classes can offer long-term returns far higher than those available from stocks. So long as an investor is working from that premise, all attractive options are closed to him at times of high valuations. Once we give up a belief in the EMT and in the Buy-and-Hold Model that follows from it, hundreds of doors open to us. My aim is to describe those opportunities to people.

Sorry for all the words. I hope that there is at least some useful stuff to be found in them. Please don’t feel any need to respond while you are away from the usual grind. If you have any questions or concerns or comments or added thoughts, I’d be thrilled to hear them at any time it is convenient for you to share them.

Rob