Set forth below are my responses to a number of points made by Wade that can be addressed with a limited number of words.

It is hard to have public communications with you after all the attacks you made toward me at your blog following the Bill Bengen incident.

I said that Wade was not posting with complete honesty. His position was that Bengen got the numbers wrong in his retirement study (Bengen himself acknowledges this) but that there was not need for Bengen to correct the study.

I do believe I am still on the Good Side.

I believe that Wade believes this. I believe that Wade has done a huge amount of very important and grounds-breaking work. I have fond feelings re the 16 months we were working together. I learned a lot from him. I know he will be successful in days to come. I certainly wish him all good things.

Planners have been receptive to the idea that 4% is not safe in recent years. I’m getting the message out. 

Both of these statements are true.

There are many people who think that the whole idea of 4% being a safe withdrawal rate is just ridiculous.

Why didn’t any of these people speak up during the nine years when I was on my own trying to get the discredited retirement studies corrected? There are millions of people who will likely be suffering failed retirements in days to come because of our failure as a society to get those studies corrected promptly. A failed retirement is a serious life setback.

Drawdowns from a volatile portfolio are inherently risky. 

Wade’s own research shows that this is not necessarily so. Wade’s study on Valuation-Informed Indexing shows that the maximum drawdown for a Buy-and-Hold portfolio is 61 percent. But the maximum drawdown for a Valuation-Informed Indexing portfolio is only 20 percent. There’s not that much risk associated with stock investing for those who follow a strategy that even in a worst-case scenario (we are talking about the worst case seen in 140 years) causes a portfolio drawdown of only 20 percent.

Volatility on the upside presents zero problem. Valuation-Informed Indexers subject themselves to only a very limited amount of volatility on the downside. Stocks are an insanely risky asset class for those who ignore valuations. But there is no law of the universe that requires retirees to do this. All responsible investment advisors should be imploring their readers not to do this.

Your insight about valuations is important and useful and I still discuss it, but it is ultimately just one piece of a much broader story.

I certainly agree that valuations is not the only thing investment analysts need to look at. But Wade’s own research shows that it is by far the most important factor. I think it would be fair to say that valuations is 80 percent of the stock investing story. An investor who gets valuations right and gets everything else wrong will probably end up okay. An investor who gets valuations wrong and gets everything else right will almost certainly not do well in the long term.

Current conditions matter more than historical averages

Bogle’s most important insight was that investors need to focus on the long term. I view Bogle as the second most important investing analyst of all time largely because of the far-reaching implications of this all-important insight. Wade is rejecting that insight with these words. He is saying to focus on “current conditions.” It is the focus on current conditions that makes investing so emotional an endeavor. Conditions are never as bad as they look when they look bad and conditions are never as good as they look when they look bad. The key to success is getting over the natural inclination to focus on current conditions by using the historical record to come to an informed and emotionally balanced understanding of how things always play out over the long run. It is not that you want to look at “historical averages.” It is that you want to learn from history how stock investing works and then use that knowledge to help you keep your head when others are freaking out over current conditions.

It is why financial economists find it so perplexing to discuss the concept of a safe withdrawal rate. There isn’t one. The U.S., even since 1871, represents a rather unique period in world history.

Everybody understands this. Every SWR study, both Old School and New School, comes with a caveat that the number being reported is safe only if stocks perform in the future somewhat as they always have in the past. There is of course no guaranty that this will be the case. But the historical record is all we have to go by in trying to employ human rationality to understand stock investing. Rule out consideration of the historical record and you leave academic researchers like Wade with nothing to do. Wade himself made this point in his correspondence with me when Buy-and-Holders faulted his research on grounds that it studied “only” 140 years of data (that’s the entire record available to us today).

The worst-case that showed up during this time can hardly be expected to be representative of the future.

Properly calculated SWRs have always provided powerful insights in the past. The P/E10 value that applies today identifies a range of possible returns that will apply in 10 years. Where the actual return will fall on that range is determined by investor emotion and thus is unknown in the current day. So properly calculated SWRs do not tell you all you would like to know. But identifying the range of possibilities is a huge help. For a retiree to fail to take the properly calculated SWR ito consideration when putting together his retirement plan is a big mistake, in my view.

I do think valuations may help gain insights about what the withdrawal rate will be, but this certainly does not make the estimates safer.

This statement self-contradicts. He is saying that added knowledge is a plus but that added knowledge is not a plus.

The relationship between valuations and withdrawal rates can change as well. We are still prone to black swans.

Wade asserts this without offering support for the statement. If we were to see a 65 percent drop in stock prices next year, that would not put us in black swan territory. That’s what you would expect to see, given the valuation levels we saw in the late 1990s and early 2000s. The crash of the early 1930s was not a black swan event to those who understand the effect of valuations. Given the valuation level we saw in 1929, the path that returns took in the following years was what you would expect; the losses were not much less than the losses that were most likely or much greater than what was most likely.

I am not aware of any showing that the relationship between valuations and safe withdrawals has ever changed. The only thing that changes is the spot where we happen to land on the range of possibilities. That spot is unknown in advance because it is determined by investor emotion. We can only identify the range of possibilities. But that’s a very big help to investors who make use of knowing it.

Trying to estimate safe withdrawal rates after incorporating valuations does not “correct” anything. End of story.

If you say so, Wade.

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.

Wade possessed a Ph.D. in Economics from Princeton at the time he made those statements.

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

The Goons certainly didn’t read Wade’s comments that way. Drip Guy went off his rocker when he saw Wade say that he had asked the Trinity authors for a correction. His comment is at the thread on my blog where Wade told us that he had contacted the Trinity authors. Wade reported to me a few days later that he had not yet received a response. He was telling me this because he knew how long I had worked to get a correction in the discredited retirement studies. Why would I want to know whether or not the Trinity authors had responded to an “apology”? I think it is possible that there was some sort of apology contained in Wade’s e-mail. I am certain that he took a soft approach in asking for a correction. But the entire context of his comment “I’ve taken care of it” was that he had requested a correction. This comment came after long discussions of whether a correction was needed or not and immediately following a post of mine in which I argued that we will be seeing a political explosion when middle-class investors learn of the 10-year cover-up of the errors in the studies.

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.” 

I am the person who discovered the errors in the studies. I did this 10 years before a consensus was achieved in this field that the studies are in error. Had the errors been corrected at the time I first requested corrections, millions of people would have been spared one of the worst life setbacks imaginable and the people who have participated in the 10-year cover-up would have been spared billions of dollars in legal liabilities. Is there something bad about giving me the credit I merit for the role I played here? We all want to spare people from suffering failed retirements, no? Sure, I want to be paid for the good work I have done. The people who produced the discredited studies won a great deal of fame and wealth for causing the millions of failed retirements. The people who participated in the 10-year cover-up have been rewarded handsomely. I think it would be fair to say that things are more than a little mixed-up in InvestoWorld when the only one in this field who is singled out as not deserving of fame and wealth is the one who spoke up about the need for the studies to be corrected.

Wade is here acting like he wants to be part of a Boy’s Club in which all members of the club protect the other members of the club when doing so works to the detriment of the investors that the club members are supposed to serve. I care about my readers. I want them to have access to good information. Those leading the cover-up have denied me the ability to make a living for 10 years as part of their effort to keep information about the errors in the retirements studies from the middle-class investors who need to know about them. Yes, I would like to be paid for the good work I have done and to receive all the credit that is due me for discovering these errors ten years before any of the big names in the field. I did not feel that I was hurting the feelings of the people who made the errors. I presumed that they would want to know about them as soon as possible because that’s what I would want if the tables were turned. Should I apologize for discovering the errors in the retirement studies? Would that make the people who covered up the errors for ten years feel better about the great amount of human misery they have brought on with their supreme acts of irresponsibility?

How does a person get to a place where he gives voice to these sorts of words? What is it about the Buy-and-Hold model that drives so many otherwise good and smart people off the deep end?

intercst knows how to push your buttons. 

Threats to kill my wife and children push my buttons. I’m funny that way.

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. 

Wade’s decision not to do more research on the superiority of Valuation-Informed Indexing was affected by the “hostile atmosphere” (Wade’s term) he encountered when in the presence of Buy-and-Hold advocates. He said that he was not going to do that research because it was “controversial.” It was the hate directed at him by the Buy-and-Holders, combined with the failure of big-name Buy-and-Hold advocates like Bogle to offer their support, that persuaded Wade that this issue was too hot for him to handle. Wade’s change in position re whether the discredited retirement studies should be corrected was obviously affected by the pressures applied to him. It is not possible that anyone not feeling intense pressures to believe otherwise would not believe that discredited retirement studies should be promptly corrected. The praise that Wade directed to John Greaney, the fellow who threatened to kill my wife and kids if I continued to post honestly on SWRs, was obviously a result of pressures applied to him. My guess is that those words were written by Greaney and that Wade merely put his name to them in exchange for a promise on the part of the Goons not to continue to try to destroy his career.

I certainly do not say that Wade has doctored his research, either before or after he was threatened. I believe that there is zero chance that anything along these lines ever happened.

You owe Mr. Bengen an apology, because it does look like the 2000 retirees are going to be okay after all with 4%.

This is not so. The retirements that began in 2000 and were based on the Old School SWR studies are in serious trouble. Even if this were so, I would not owe Bill Bengen an apology. His study got the numbers wrong. If the retirements survive, that doesn’t change that. If someone is irresponsible enough to tell someone that it is safe to drive drunk and the person follows this advice and lives, the person who gave the bad advice still gave bad advice. The historical data shows that a retirement beginning in 2000 and using a 4 percent withdrawal has only a 30 percent chance of surviving 30 years. That’s not “safe” according to any reasonable understanding of the word.

Again, it’s all about covering up for one’s friends in the Boys Club. Does the effect on the retirees even get considered by the “experts” in this field? These sorts of comments evidence a very serious public policy problem. If anyone had told me on the morning of May 13, 2002, that this callous indifference to human suffering is this common in this field, I would have rejected the possibility out of hand. What sort of madness is it that causes people to create a “controversy” over whether errors in retirement studies should be corrected or not? Is that a hard one? We really need as a society to get to the bottom of this and fix the problem. There are millions of investors who place their trust in “experts” in this field. I put the word “expert” in quote marks because I don’t see how the word applies to people who do not understand the need to get numbers in retirement studies accurate. This is the ABCs.

I’m not sure if you can even distinguish a mean from a median.

I can distinguish a mean from a median. Just barely. The numbers stuff is not my strong point. I think it would be fair to say that I do a much better job than most of the big shots in this field of distinguishing honesty from dishonesty, responsible behavior from irresponsible behavior, courage from cowardice. That’s the job that has been assigned to me. I did not ask for that job. It was assigned to me when the reaction to my May 13, 2002, post was not “Wow, thank you Rob for letting us know about those errors so that we can quickly correct them before our retirement studies do even more harm to even more people!” but instead “We are going to kill your wife and children, Rob, if you continue to talk about this!”

Wade obviously did not create this problem. The full reality is that he has done much more than most to fix it. Still, Wade will presumably be working in this field for many years to come. He should be as concerned as I am that it soon become possible once again for people of intelligence and integrity to feel comfortable working in this field. We should ALL want that. We should ALL be on the same side re issues of personal integrity. Means and medians are not the only things that matter in this world of ours.

I’m not sure how a properly calculated lower confidence bound for a 2000 retiree could have been higher than zero.

This is an uninformed and confused statement. The SWR for an asset class that provides a long-term average return of zero is 3.33 percent (SWR studies presume that the portfolio will be reduced to zero over the course of 30 years). The 1.6 percent SWR that applied for an 80 percent stock portfolio in 2000 is a shockingly low number. The number is so low because the first 10 years of a retirement has a disproportionate effect on the retirement’s long-term survival prospects. For Wade’s claim that the SWR for an asset class that provides a long-term average return of 6.5 percent real is zero is not a serious one.

In January 2011 I still thought that Valuation-Informed Indexing I was all your creation, and it was only later that I internalized that this is old stuff since the stock formula plans of the 1940s and 1950s. VII is Lucille Tomlinson’s variable-ratio plan from 1953.  

If all that I have argued for 10 years was known to all on the morning of May 13, 2002, what has all the noise been about?

Benjamin Graham argued in his book Security Analysis (written in the 1930s) that investors should be going with a 75-percent stock allocation when prices are low, a 50-percent stock allocation when prices are moderate, and a 25-percent stock allocation when prices are high. That’s Valuation-Informed Indexing! The idea of investing rationally has obviously been around since the first market was opened for business. The problem we have today is that for the past 30 years the “experts” in this field have been telling millions of middle-class people that it is okay for them not to consider price when setting their stock allocations (the claim is that long-term market timing is not required or even that there might be circumstances in which long-term market timing might not work). This demonstrably false and dangerously irresponsible claim has caused millions to suffer huge losses. The collective losses have grown so large that we are now in an economic crisis, a crisis that will likely become the Second Great Depression in the event that stocks continue to perform in the future anything at all as they have always performed in the past.

Investing analysis was not an academic pursuit in Benjamin Graham’s time. At the time Buy-and-Hold was developed, there were many smart and good people who believed that the market is efficient. If that were so, Graham’s insight that it is necessary for investors to change their stock allocations in response to big price swings would not be valid. Graham’s insight is valid. There is now a mountain of research showing this. The problem we have today is that thousands of investment advisors have for three decades now been advancing demonstrably false claims about how investing works and about what the academic research of the past three decades shows us about how stock investing works. The collective legal liability for this mountain of demonstrably false claims is now in the trillions of dollars. The question at the root of our discussions is — How do we as a society make the transition from this dark place we are in today to the very bright place we will be in when we work up the courage to permit honest posting on SWRs and many other critically important questions.

Valuation-Informed Indexing marries the powerful insights of the smartest investors who have ever lived (the Value Investors, who root their ideas in the teaching of Graham and Warren Buffett) with the three breakthrough ideas of the Buy-and-Holders: (1) the idea of using academic research to guide one’s investing decisions and to avoid emotional responses; (2) the idea that average investors, people who do not have the time or inclination to do much research, should invest in indexes rather than in individual stocks; and (3) the idea that investors should focus on long-term results. That’s it. It is a simple concept. But it is a very, very, very powerful concept. Wade’s research and the excitement he felt when he produced the research showing that Valuation-Informed Indexing always provide far higher returns at greatly reduced risk, shows this. Investors who make the switch from Buy-and-Hold to Valuation-Informed Indexing to Buy-and-Hold thereby reduce the risk of stock investing by 80 percent. That’s no small thing.

We certainly should be grateful for the contributions made by Lucille Tomlinson. We should also be grateful for the contributions of John Bogle. We should also be grateful for the contributions of Warren Buffett. We should also be grateful for the contributions of John Walter Russell. We should also be grateful for the contributions of William Bernstein. We should also be grateful for the contributions of Wade Pfau. We should also be grateful for the contributions of Eugene Fama. We should also be grateful for the contributions of Rob Arnott. We should also be grateful for the contributions of Jeremy Siegel. We should also be grateful for the contributions of Andrew Smithers. We should also be grateful for the contributions of Benjamin Graham. We should also be grateful for the contributions of Michael Kitces. We should also be grateful for the contributions of Scott Burns. We should also be grateful for the contributions of Ed Easterling. We should also be grateful for the contributions of Cliff Asness.

Oh.

And we should also be grateful for the contributions of that passionate fellow whose only claim to expertise in this field is that he happened to figure out what buttons he needs to push to get his words to appear on the computer screens of internet searchers everywhere. I cannot remember the fellow’s name. But we probably should say a hearty “Thank You!” to that fellow as well. He put up a post on the morning of May 13, 2002, pointing out the errors in the Old School safe-withdrawal-rate studies 10 years before any of the big shots in this field caught on to the concept. Boring, I know. But still… It never really hurts to say a hearty “Thank You!” to someone trying to help out, does it?

Here’s one thing I know for sure. We will begin making a whole big bunch more progress in a whole big bunch less time when we start devoting a little less mental energy to worries over who is going to get the credit for the transition from Buy-and-Hold to Valuation-Informed Indexing and a little more mental energy to what we need to do to get the word out about what works to the millions of middle-class investors who today are in desperate need of this information. That’s my sincere take re that one, in any event.