A Rich Life

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

“No One Can Attain True Expertise Because of the Taboo on Pointing Out the Flaws of Passive Investing””

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on November 25:

Michael:

I changed the title of the podcast to “My Conversations with Michael Kitces.” The podcast itself still includes the discussion arguing that no one can attain true expertise today because of the taboo on pointing out the flaws of the Passive Investing model. But the discussion makes clear that this argument is not in any way intended as a dig at you or your abilities. You’ve persuaded me that it is better not to risk confusion among those who only look at the title and then move on. Thanks for sticking with it long enough to bring me around re that one.

I love the first long paragraph of your e-mail. That all sounds real to me. I continue to believe that we very much need to change the ways in which we describe things so that the risks of Passive Investing are made more clear to people. But there is obviously another side to the story or else we wouldn’t have ended up where we stand today in the first place. You are addressing the realities in a clear and understandable and believable way with those words. I have not found too many willing to do that. So I was very happy to see those words appear before me on my computer screen this morning.

Have a great Thanksgiving!

Rob

“A Large Number of People Will Harm Themselves
If They Do Anything Besides Being Passive”

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that Michael sent to me on November 25:

Rob,

Thanks for the follow-up on this.

Just bear in mind that I don’t think you’re EVER going to see a “true” universal consensus on this issue, if only for the simple reason that many people invest so emotionally they WILL ALWAYS make terrible mistakes and do harm to themselves if you ever give them “permission” to not simply hold passively and strategically (or otherwise find a way for them to move active investment control out of their own hands). In other words, it is a reality that a large number of people will continue to do harm to themselves in investing as long as they do anything besides being passive and strategic, because THEIR version of active is counter-productive due to the emotional transactions that take place.

That’s not to say all of this conversation isn’t good, and that we shouldn’t try to move forward – but there IS a very real human reality to acknowledge here. You’d be shocked if you saw the kind of harm I’ve seen people do to themselves as a financial planner by the time they come to our firm, that all would have been avoided if they had simply been passive and strategic and taken their hands OFF their own portfolio. Obviously, I don’t believe that’s a universal prescription – in our firm itself we are active, tactical managers, who believe there’s significant benefit to incorporate valuation into evaluations of investments – but likewise that doesn’t mean that a personal implementation of valuation-driven investment risk management is necessarily going to be effective for everyone either. 

As for the podcast title – I appreciate your efforts, although ironically I don’t think the new one is any improvement. 🙂 Now it just sounds like you’re taking a bigger dig at me – that you’re implying I’m not even an expert (by putting “expert” in quotes), AND that I just don’t get it. A reader without context would probably read it as the equivalent of “My conversations with Michael Kitces, showing that even a well-informed expert like him is just an “expert” who just doesn’t get it”. If these are supposed to be separate, you might clarify that for certain. Something like “My Conversations With Michael Kitces — Also, a look at how even the Best-Informed “Experts” Just Do Not Get It.” I know it’s long, but at least it makes the point that these are separate statements, and that the second isn’t supposed to be a negative reflection on the first. 🙂 In any event, thanks for your efforts to not make this sound like a slam against me. 🙂

With warm regards,
– Michael

“For Purposes of Community-Building, It Is Dogmatism That Is the Enemy, Not Passive Investing”

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I recently posted a Letter to the Editor to the www.Early-Retirement-Planning-Insights.com site. It is entitled A Note to Wayne re “the Jerks.”

Juicy Excerpt: Those of us who believe that valuations matter and that the markets are not instantly efficient also need to be accepting of the reality that there are many smart and good people who continue to this day to believe in the Passive Investing model. In an intellectual sense, Passive Investing is the enemy. For purposes of community-building, it is dogmatism that is the enemy, not Passive Investing. We all should always make an effort to extend the hand of friendship to Passive Investing enthusiasts. We can learn valuable things from these people. We have in the past and we will again in the future.

Podcast #17 — Passive Investing Is the Most Emotional Investing Approach of All (Part Four)

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I’ve added Podcast #17 to the “RobCasts” section of the site. This one is entitled Passive Investing Is the Most Emotional Investing Approach of All (Part Four).

Johnny Rotten asked his audience at the close of the last concert held by the Sex Pistols: “Have you ever had the feeling that you have been taken?”

Podcast #16 — Passive Investing Is the Most Emotional Investing Approach of All (Part Three)

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I’ve added Podcast #16 to the “RobCasts” section of the site. This one is called Passive Investing Is the Most Emotional Investing Approach of All (Part Three).

This series of podcasts goes over 35 “alarm bells” that caused me to lose confidence in the Passive Investing model over the past six years of community discussions.

Podcast #15 — Passive Investing Is the Most Emotional Investing Approach of All (Part Two)

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I’ve added Podcast #15 to the “RobCasts” section of the site. This one is called Passive Investing Is the Most Emotional Investing Approach of All (Part Two).

I gave thought to calling it “The Radicalization of Rob Bennett — How I Came to See Passive Investing as the Enemy of the Middle-Class Investor.” Holy moly!!

The Rob Bennett Challenge
to Passive Investing Enthusiasts

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I’m some guy who posts stuff on the internet.

Some people think that I should learn my place. Some people think that I should stop talking back to my betters.

I can’t do that. I think of my fellow community members as my friends. When you learn things that can help out your friends in a big way, you let them know. I will continue to report the safe withdrawal rate accurately. I will continue to post honestly on what the historical stock-return data says about the effect of valuations on long-term returns.

I’ll continue to get flak for doing so too. I think that much is more than fair to say.

The fellow who runs the Clever Dude blog came up with a great solution to the abusive posting problem a few weeks back. There were some abusive posters posting comments on a guest blog entry that I wrote for that blog and the guy who runs it said: “I’d like to invite any and all of you to submit guest posts as well (go to my Contact page) to counter Rob’s article or to write about any other topic you like.”

That’s the right stuff. Civil and reasonable humans work out their differences by talking them over, not by participating in never-ending smear campaigns. I followed by putting forward a similar invitation of my own. I said: “I extend the same offer re space at my blog. I would love to see people contributing guest blogs that offer ideas counter to my investing views. I of course have strongly held views and I of course am obligated to state my sincere views. So I see the biggest weakness of the Financial Freedom Blog [now the A Rich Life blog] being the lack of balance in perspectives being shared. I get some comments putting forward other points of view, but not enough of them. So if Schroeder or others would like to make some points in a guest blog, I very much encourage them to send me some words.”

There have been no takers. None of the Passive Investing enthusiasts who have terrorized the Retire Early and Indexing communities over the past six years have written up any words explaining their case in civil and reasoned language. Surprise! Surprise!

I say “Surprise! Surprise!” because I have made similar offers on a number of earlier occasions. I asked Greaney to participate in a debate of the safe-withdrawal-rate topic at the Motley Fool board in which only he and I would post and members of his Goon Squad would not be permitted to disrupt. No dice. I offered to appear on a radio show with Greaney at which he would argue in support of the Old School SWR studies and I would argue in support of the New School SWR studies. No dice. I included in an article that I posted to the web site several years back an offer to provide space for Greaney or Sholar or any of the other “defenders” of the Old School studies to make their case. No dice.

I want dice!

I want dice because it is important to be fair and balanced. I say that the demonstrably false claims advanced in the Old School studies are likely going to cause millions of busted retirements in days to come. That’s a startling claim. If it is true, I have absolutely no choice but to advance it. To fail to try to get the word out to millions of people whose retirements are likely to fail would be an unforgivable dereliction of my responsibilities to the community. On the other hand, if there is something wrong with the claim, I have a responsibility to let people know that and to correct my words. So I should be doing all that I can both to publicize the flaws of the Old School studies and to learn of any flaws in the New School concept (the New School argues that it is impossible to calculate the SWR accurately without including an adjustment for the valuation level that applies on the start date of the retirement).

How are we all to learn whether the “defenders” of the Old School studies have any justification for not calling for the correction of them unless they tell us what it is? I believe that the reason why they have not offered any justification is that there is no possible justification. Still, I don’t think it hurts to open this blog space to anyone willing to take a stab at defending the Old School methodology. Hence — the Rob Bennett Challenge to Passive Investing Enthusiasts.

I hereby challenge any defender of the Old School studies to write up a blog entry explaining why he or she thinks it is a good idea not to include an adjustment for the effect of valuations in an SWR study. Send it to me (please note the “Contact Rob” tab at the left-hand side of this page) and I will schedule it for posting at the A Rich Life blog.

We’ve gone well beyond discussion of the flaws of the Old School SWR studies in recent years. So I would like to make the Challenge broad enough to cover more than the topic that kicked off The Great Debate. I believe that the truly core issue is the Passive Investing issue. Does it make sense to urge investors to stick with a stock allocation elected when prices were reasonable when prices have reached dangerously overvalued levels? I say “no way!” If you say “yes, way!” please give some thought to writing up some words and passing them along for posting where your fellow community members can read them and learn from them.

I will not comment on any blog entries submitted within the text of the blog entries themselves. I may or may not comment in a subsequent blog entry posted under my own name. I won’t offer the first comment to any blog entry posted as part of The Rob Bennett Challenge. If others comment, I may or may not offer my views in response to those comments, as I would re comments posted in reaction to my own blog entries.

I’m not expecting to receive any blog entries in response to the challenge. I would love to be surprised.

There’s no deadline. I’m happy to see your reasoned defense of either the Old School SWR studies or the Passive Investing concept whenever time opens up in your schedule for you to do us all the favor of writing one up.

As Clint Eastwood nearly said:

Ya feeling challenged today, Goon?
Well, are ya?

Note: I am of course with the references to “Goons” having a little fun with those good friends of mine who have been terrorizing the Retire Early and Indexing boards for six years now. Non-Goon submissions are both welcomed and encouraged. They will be pushed to the top of the list! They are preferred!

Today’s Passion: When I’m not caught up in the important business of challenging Goons, I often spend my time coming up with saving advice sayings. My favorites are collected in an article entitled Rob Bennett’s Favorite Saving Advice Sayings.

Passive Investing Has Already Failed

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Passive Investing is an approach in which you stick with the same stock allocation despite wild price swings. It became hugely popular during the wild bull. Its popularity is now in the process of bringing about the largest loss of middle-class wealth in the history of the United States (presuming that stocks perform in the future anything at all as they always have in the past).

The Stock-Return Predictor tells us that, at a time when the P/E10 value is 8 (the value that applied at the beginning of the huge bull), the most likely 10-year annualized real return for stocks is 14.5 percent. At a time when the P/E10 value is 44 (the value that applied at the end of the wild bull), the most likely 10-year annualized real return for stocks is a negative 1 percent. There is no stock allocation that makes sense both at a time when the likely 10-year return is 14.5 percent and at a time when the likely 10-year return is a negative 1 percent. Passive Investing is irrational.

Lots of smart people think it is a great idea. How come?

Say that you began investing in stocks at the time when the P/E10 value was 8. You obviously enjoyed great returns for a number of years. As prices climbed, your common sense told you that you should lower your stock allocation a bit. A voice from your dark side (you greedy cuss!) said “no, hang on, this money for nothing business is too cool!” The Passive Investing enthusiasts told you to pay attention to that voice. You did. You enjoyed more years of great returns.

Passive Investing is addictive. It works. And it works. And it works. And it works.

And then it doesn’t.

That’s how it has always happened. There’s an important sense in which what we are going through today is nothing new.

There’s another sense in which it is new, however. What is new is that this time Passive Investing paid off bigger and for a longer period of time than ever before. We never reached a P/E10 value of 44 before. The number that applied in the month before The Great Crash of 1929 was only 33. We shot way past that bad boy in late 1999.

So Passive Investing worked better this time than ever before, right?

Not right.

Extreme valuations are bad for middle-class investors. Yes, you make lots of money on the up. You then give it back on the down. The end result is not that you break even. The end result is that you are conned into believing that you are wealthier than you are, you make plans for the future based on what you believe your accumulated wealth to be, and then you see those hopes crushed. Middle-class investors are better off if stocks go up a steady 6.5 percent real per year.

Our belief in Passive Investing caused the huge bull. Rational investors would never have permitted valuations to climb so high. Our belief in Passive Investing put our minds in a collective fog. We let things get more carried away than we ever have before.

Most are going to wait until prices crash to term Passive Investing a loser. Not me. The financial losses we are suffering now are just the inevitable result of the crazy price jolts we saw in the late 1990s. The real problem is the craziness that Passive Investing injects into the investing system during up times, not the financial losses that inevitably follow when we are seeking to find our way back to sane price levels.

That’s my take. I don’t need to see the price drops to conclude that Passive Investing hurts humans and other smart, fun-loving mammals. My view is that the losses we suffer in a wild bear are just a natural consequence of the insanity we yield to during a wild bull. The damage has already been done. Passive Investing failed in my eyes when it caused the insanity of the late 1990s.

Please don’t think that I wish these losses on anyone. That’s always the accusation leveled at those who talk straight on stock investing. I want us to learn enough about stock investing to avoid both the insane price jumps of times like the 1990s and the painful aftermath of such eras of insanity. I focus on the cause of the pain rather than the pain itself because it is only by focusing on the cause that we can hope to help people. Bemoaning the price drops accomplishes nothing unless we use that pain to change our behavior during price cimbs.

Passive Investing causes the insanity that does in stock investors. The insanity is behind us; we are now in the early stages of recovery from it. That’s why I say that we do not need to see the price drops to conclude that Passive Investing has failed. This low idea has already accomplished its dirty work.

Today’s Passion: The article entitled Rational Investing vs. Passive Investing offers even more mean-spirited commentary about the most popular investing strategy in the history the world.