A Rich Life

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

Rob Bennett to Academic Researcher Wade Pfau: “People Cannot Live In This Sort of Dishonesty Forever. What We Are Going Through Is a Temporary State. It Will Change After the Next Crash. Then Things Will Be Flipped. There Will Be Lots of Angry People Demanding the Heads of Those Who Failed to Speak Up And I Will Be the One Asking for Mercy and Asking People to Understand the Pressures That People In This Field Faced.”

by

Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on April 5, 2012. Wade sent a folow-up e-mail later the same day.

He said: “Coincidentally the article stemming from that January 2011 blog post was published today. I’m attaching it and you can find your name on page 12 of the PDF. So please take it easy and don’t act like I’m an enemy of you or anyone because I don’t agree with 100% of your views.

Here is the link for the article:

http://dx.doi.org/10.1080/09603107.2011.648317

I responded the next morning. The text of my response is set forth below.

Wade:

I am of course grateful for the mention in the paper. Thank you.

I wish that you could read the paragraph that makes the mention through my eyes. You thank the Bogleheads, which is appropriate. And you thank Rob Bennett, which is appropriate. But there is something
horribly wrong being conveyed with those words.

I am a Boglehead, Wade!

The way it should be is that, when you are thanking the Bogleheads, you are thanking me because I am one of the leading voices in that community. I am not saying that you should have taken on that question in that paragraph. That obviously is not the place for it. But the idea that there is some distance between the Bogleheads concept and the Rob Bennett concept is the problem that is holding us all back .

You of course ran into the same thing. You posted some wonderful research at Bogleheads and Mel Lindauer suggested you had doctored the results. You came back at him in a firm way. That was one of your finer moments. That’s what we need. We need people speaking up to that segment of the Bogleheads community that opposes integration with those who accept and explore the message of the last 30 years of research.

We cannot have two camps. Wade. We can of course have disagreements within a single camp. That is healthy and to be expected. But we cannot have two camps. The same research applies for everyone. Investing works in the same way for everyone. Everyone must favor learning and therefore everyone must favor permitting all voices to be heard.

This is why it is so important that the Old School SWR studies be corrected. A big part of it is that we don’t want to see millions of failed retirements. We don’t want to be dishonest to our customers, the people who make use
of the research. But another very important consideration is that we don’t want to be dishonest with OURSELVES. Mistakes are a wonderful thing. They bring on learning experiences. Mistakes that are covered up do not bring on learning experiences. They bring on rigidity. Our participation in cover-ups undermine all the good work we do.

You didn’t create this problem. I obviously understand that. But you are part of it whether you like the idea or not and whether you think that is fair or not. Every single person working in this field today is affected by this problem. The work of each and every one of us is affected. How we deal with this problem determines to what extent the implications of our work can be explored and to what extent our findings can be heard and put to good use.

You have a part to play. I do too. My job is to REPORT the story. It’s an important job. I take pride in it. I cannot yield to pressure to perform my job dishonestly.

It is dishonest not to correct a study that gets the numbers that people use to plan their retirements wrong, Wade. That is not  a controversial statement. It is an OBVIOUSLY true statement. The strange thing is that you don’t hear lots of people saying that today, only me. That’s exceedingly odd. But the oddness of our circumstances does not change the objective reality. The Old School studies must be corrected and we must make an effort to learn from the mistakes that caused them.

That’s how we achieve healing. That’s how we bring everyone together. That’s how we learn how to interact with warmth and kindness and good cheer and good humor. That’s how we become able to feel good about our futures again and about the work we all do.

If I were to say that it doesn’t matter much whether Bill Bengen corrects his study or not, I would be dissing Bill Bengen. I would be saying that his work doesn’t matter much or that I have such a low opinion of his ethical standards that I never expected him to be able to adhere to the most basic social norms. I’ve obviously never said such a thing about Bill and I obviously never will.

I would have been saying the same sort of thing about you if I reacted any other way to your statement that it was “harsh” of me to insist that Bill correct his study. I’ve obviously never said such a thing about you and I obviously never will.

This is a people business. People cannot live in this sort of dishonesty forever. What we are going through is a temporary state. It will change after the next crash. Then things will be flipped. There will be lots of angry people demanding the heads of those who failed to speak up and I will be the one asking for mercy and asking people to understand the pressures that people in this field faced and all this sort of thing.

Everyone working in this field today wants to fix this problem,  Wade. Even the Goons want to fix it. They obviously won’t say so in direct words. But there is a part of them that wants to fix it. I talk to them every day. I know.

We cannot fix it in a day. I understand that. We need to be making consistent, measurable progress. We can’t settle for less than that. We need to work up enough courage to be able to insure that at least that much is being achieved at all times.

I am a Boglehead, Wade. If you have gotten in the habit of thinking otherwise, that’s a problem. It’s a trick that the Goons have played on you. We are all working toward the same goal and that needs to come through. This is your problem. Not
just yours. But it is the problem of everyone who works in this field and you are such a one.

I am always going to have the hand of kindness outstretched and I am always going to be willing to do whatever I can do to get things back on the right track. I am never going to be willing to post dishonestly on safe withdrawal rates. It is
an insane thing that pressures were ever exerted on me (or you or anyone else) to do such a thing.

I wish you all the best, my man. I am always available to talk over any aspect of this with you or with anyone else who sees opportunities to take things to a better place.

Rob

Rob Bennett to Academic Researcher Wade Pfau: “I Strongly Believe That There Are Things You Must Do and Things You Must Not Do to Protect Your Reputation As An Ethical Person. I Believe Today That There Is Serious Reason to Question Whether You Have Managed to Stay on the Right Side of the Line…. Are You Insane, Man? Please Think!”

by

Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on January 1, 2012. My next e-mail to Wade was dated April 5, 2012, and was titled “Concerns Re You Going to the Dark Side.” The text is set forth below.

Wade:

I hope things are going well with you.

This e-mail will not be a pleasant one to write (or to read). I don’t think I have any choice but to write it, given recent developments.

Before I start, I want to state the obvious preface. I have great feelings of respect and affection for you personally and I admire your research work probably more than anyone else alive on Planet Earth today. In ordinary circumstances, that would be the basis for a wonderful relationship. As you know, there have been things that stood in the way of that since our first communications. Those obstacles have always saddened me. My strong sense is that the problem side of the relationship has grown much worse since your postings at my blog re whether Bill Bengen should correct the errors in his SWR study. The purpose of this e-mail is to (1) attempt to confirm whether that is indeed the case or not; and (2) get some things off my chest that I need to get off my chest to fell that I have always dealt with you in good faith.

You are of course aware that there has been an organized effort on the internet to destroy my reputation which has been led by Mel Lindauer and John Greaney  and which has made it impossible for me to earn a living for 10 years now. I believe you know that I plan to bring lawsuits against the sites that have permitted the Lindauerheads and the Greaney Goons to engage in defamation and death threats and other tactics to block numerous board and blog communities from learning what they need to learn what the last 30 years of academic research says about safe withdrawal rates and other important investment-relarted topics.

I believe that we all have a responsibility as part of the ethical demands of our respective professions to speak up when we see this sort of behavior. I have of course spoken up. You have spoken up on a few occasions in small ways but generally have kept quiet re this aspect of things. It’s not easy to say where precisely the line should be drawn re speaking up or not speaking up. My problems are of course not your problems and I of course do not expect you to feel as  great a concern re this aspect of the question as I feel since I am directly involved. That said, I strongly believe that there are things you must do and things you must not do to protect your reputation as an ethical person. I believe today that there is serious reason to question whether you have managed to remain on the right side of the line.

I was questioned the other day by one of the Goons as to whether we were still in e-mail communication. My answer was that I presumed we were. I don’t recall us having a back-and-forth discussion since the day you posted on the Bengen blog post. My recollection is that I sent you a copy of an e-mail that I sent to a visitor at my site because he referenced you in the e-mail and I wanted you to see both his words and my words. I did not receive a response to you re that e-mail but I did not see that as being a big deal.

Today, I was communicating with another financial blogger and wanted to send him a link to the blog post in which you explored Valuation-Informed Indexing and found that it beat Buy-and-Hold in 102 of 110 of the rolling 30-year time-periods in the historical record. As you obviously know, this post of yours was a big help to me in trying to overcome the Campaign of Terror against me and the many board communities in which numerous community members have expressed a desire that honest posting on SWRs and other valuation-related topics be permitted. The goal of the Internet Sewer Rats has been to persuade my potential readers and customers that I have not done important work and your mention of my name in a post that shows that I was right all along made it impossible for them to continue to maintain that position.

You have removed my name from the post. Why?

You of course have a right to re-write posts. In this case, however, the action is an exceedingly odd one. You have been attacked by Lindauer yourself. You have acknowledged in posts that Drip Guy has sent you e-mails and you have changed positions you have taken in discussions at the Bogleheads board as a response to his threats. When you contacted the Trinity authors about correcting the errors in their SWR study, the Greaney Goons put up posts threatening to get
you fired from your job if you followed through and you then retreated from your position after letting me know that you were indeed concerned that you might lose your job as a result of their actions. We of course both know that the Sewer Rats have employed similar tactics in numerous other cases.

I believe you are making a huge mistake, Wade.

Please don’t hear that as a threat. I hope you will hear it as a friend speaking to a friend. I said similar words to Greaney 10 years ago and he is where he is today because he ignored those words (Greaney was my personal friend in earlier times). I said similar words to Lindauer. It breaks my heart to see another one of my friends take this horrible path. Are you insane, man? Please think!

I am a journalist, Wade. My job is to tell this story in as honest and as complete and balanced way possible. I take the responsibilities of my profession seriously and I will honor them. I WILL let personal friendships influence me (I have done
this with Greaney on many occasions). I think it would be inhuman of me not to do so. But I WILL also honor my responsibilities to my readers.

There are millions of middle-class people who have been done great harm by this economic crisis. They need to know the story here. The hardest question for them to understand is — Given that the academic research has shown for 30 years that Buy-and-Hold can never work for any long-term investor, why are there still people today advocating it? I need to tell BOTH sides of that story. That’s my job.

My strong hunch is that you would prefer to stick to the research and keep away from all this ugly junk. Guess what? Every single one of us feels the same way. The full reality here is that the reason your research has not received the attention it merits (I understand that you have received a great deal of attention and that that attention is fully deserved) is because people cannot come to terms with the ugly, emotional side of all this. If our free market economy is to survive for much longer into the future, we all need to work up the courage to deal with that side of things. We need to do so with love, to be sure. But we need to do so with honestly as well. There is no other way.

If I hear a response from you that indicates that you want to deal with the issues at stake here in a responsible way, I will do whatever I can to put in place a process that will work to help every single person involved come out of this looking as good as it is today possible for them to look. That’s the love part of the formula.

The honesty part of the formula is that, if I do not hear from you, I need to report on what you have done in this case and in your other interactions with the Goons on the Bogleheads Forum and elsewhere. I hate being put in these circumstances as I know you hate being put in these circumstances. The bottom line here is that these are the circumstances into which we were born and we both need to work up the courage to make the best of them.

Please always know that, if you see something that I have written and you feel that I have not told things in a precisely fair way, I will be thrilled to give you space in the article or blog post to tell your version of events in your own words. My preference is that it be done in that way.

Please also know that I will of course always respect the work you have done. I very much still believe that you are someday going to win that Nobel Prize and that we are going to see your name on the front page of the New York Times. It will be a great day for all of us when that happens.

Please also know that I will do everything I can to slant things as much as I can in your favor without failing to honor my obligation to my readers to provide them with the detail they need to hear to  make sense out of the amazing circumstances that apply in InvestoWorld today.

Please also know that I will always think of you as a friend and will always wish the best for you and will always be\ honored to be associated with you in any way (even if this crazy mixed-up world of ours puts me in circumstances in which I need to name you in lawsuits at other times!).

I will close by letting you know of three things that I have in mind at the moment (the purpose of this e-mail is to assure myself that I have done every last thing that I can do to avoid going ahead with these steps):

1) I am going to start a thread at the Goon Central board letting them know that I have sent you this e-mail (without posting the text).  Drip Guy asked me about you directly yesterday, which suggests to me that he feels you have been compromised. I argued yesterday that this was not the case. I don’t want the Goons thinking that I play games re this sort of thing and I have been careful always to respond honestly to their questions. So I think I need to let them know that my sense of where things stand has changed as a result of what I learned today;

2) I expect to post the text of this e-mail at my blog within another week or two. This is obviously an important development in the saga. If you have indeed gone to the Dark Side, that is a major win for the Goons, who have been feeling greatly weakened in recent months aside from this development; and

3) I am in the process of writing a long article that will detail 101 incidents of this nature (you are not the only one who is afraid of what the Goons will do to your reputation if you state your honest beliefs about investing in clear terms!). You are certainly not the focus of the piece. But my expectation is that you will be mentioned in five or so of the incidents. I just want you to know that that is in the works as I feel that each time we go a step down the dark path, it makes it harder to move to the better path for all concerned. How I wish that others could see this point as clearly as I do!

The Goons are not going to win, Wade. They CANNOT win. If we don’t help people learn what they need to learn about stock investing, the numbers show that the whole thing is going to go down (please ask if you have questions about this
aspect of things). There was a big change in people’s attitudes after the 2008 price crash. I’ve been doing this for 10 years and I can tell you that nothing had as much impact as that. The next crash is going to hurt worse (because it follows on
so many down years) and is going to cause a much bigger change in public opinion. You want to be positioned on the right side of things when that happens. We are going to need to act quickly then and we need you working with us!

If you have particular concerns or questions, please let me know of them and we can do out best to resolve them when they can be resolved with relative ease.

I cannot post dishonestly on safe withdrawal rates. It is insane that I was ever asked to do this and it is insane that there is even one responsible person who ever thought that it might be possible that I would go along with such a demand. Just
about anything else is negotiable because, once we achieve the right to post honestly on that topic, a lot of the ugly feelings of shame will dissipate. I cannot give an inch on that one. For reasons that should be obvious to all reasonable people.

Sorry for the long e-mail. I hope it leads to good things!

I wish you the best in all your future endeavors, my good (non-Goon, please?) friend!

Rob

Academic Researcher Wade Pfau: “Naturally, I Am Finding that Valuation-Informed Indexing Can Allow You to Reach a Wealth Target With a Lower Savings Rate, Use a Higher Withdrawal Rate, and Also Have a Lower ‘Safe” Savings Rate, Than a Fixed Allocation”

by

Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on December 2, 2011. Wade responded the next day.

He thanked me for my encouraging words and said: “The idea about PE10 going up being different than P/E10 going down does make sense.”

Wade told me about a book titled “How to Profit From Formula Plans in the Stock Market,” which was published in 1961.  He said that he downloaded it at a time when a free download was available but that there was no longer such a download available. He said that it talks about a “halfway rule,” which takes advantage of this concept.

The e-mai stated: “I had a productive evening.  Bengen’s discussion about changing asset allocation being the next step got me moving to combine my safe savings rates program with my valuation-based asset allocation program.  (do you remember in February when DRiP Guy complained about using a fixed allocation in my safe savings rate paper?  That is what I fixed now)  Naturally, I am finding that VII can allow you to reach a wealth target with a lower savings rate, use a higher withdrawal rate, and also have a lower “safe” savings rate, than a fixed allocation. The only exception occurs a little bit with the 1990s stock market boom, as you saw earlier with my blog entries about the rolling periods.  I’m attaching 3 figures I made about this tonight. This here is probably enough to write an article for Journal of Financial Planning.  I’m thinking about this now.

The three figures referred to by Pfau appear below:

Wade Pfau -- Valuation-Informed Retirement Planning, Figure One

Wade Pfau, Valuation-Informed Retirement Planning -- Figure Two

 

Wade Pfau, Valuation-Informed Retirement Planning -- Figure Three

ITNR #100 — The Ethics of Card Shuffling and Retirement Planning

by

I’ve posted Entry #100 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called The Ethics of Card Shuffling and Retirement Planning.

Juicy Excerpt: I said that the Old School retirement studies got the numbers wildly wrong. They did. No one disputes that today. I should be a hero to everyone in the field. But all that a lot of people hear is: “You made a mistake in your study and caused millions of failed retirements.”

I don’t say that the mistakes were deliberate. I don’t believe they were. But the people who made the mistakes have responded defensively. They think they should be above making mistakes. Or perhaps the mistakes to some extent really were deliberate, perhaps they knew that there were problems with the methodology they used and elected not to worry about them until I highlighted the issue. In their minds, they have been called out on an ethics lapse. And they intend to fight that one to the death.

VII #83 — Retirees Should Not Be Afraid to Invest Heavily in Stocks

by

I’ve posted Entry #83 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Retirees Should Not Be Afraid to Invest Heavily in Stocks.

Juicy Excerpt: The safe withdrawal rate wasn’t anything close to what the “experts” were saying it was back in the days when I was being hit over the head with bricks for reporting the number accurately. But valuations have fallen since then. The safe withdrawal rate is close to 4 percent today. My calculator shows that the withdrawal rate that has a 95 percent chance of surviving 30 years for a retirement beginning at today’s valuation level is 3.75 percent. If you were willing to go with a retirement that is only reasonably safe (an 80 percent chance of working out) and you were retiring today, you could go with a withdrawal rate of 4.35 percent.

It’s obviously true that a portfolio going with a low stock allocation is generally safer than a portfolio going with a high stock allocation. So, yes, we can solve the problem of our having caused millions of failed retirements by encouraging retirees to go with low stock allocations. That solution doesn’t come free of cost, however. Investors who go with low stock allocations when that is not a good idea lower their returns by doing so. Telling people to go with unnecessarily low stock allocations delays their retirements.

The purpose of retirement research should not be to delay retirements any more than it should be to cause failed retirements. The idea should be to report the numbers accurately. Reporting the numbers accurately permits aspiring retirees to retire as soon as is possible consistent with their desire to enjoy safe retirements.

ITNR #83 — The Retirement Advice Scandal

by

I’ve posted Entry #83 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called The Retirement Advice Scandal.

Juicy Excerpt: One thing I have learned about the investing advice field that greatly alarms me is that there is a widespread belief that mistakes are best covered up. I couldn’t possibly disagree more. My life experience is that discovering mistakes leads to wonderful things. It is when you discover mistakes that you discover better ways of doing things.

Financial Mentor Site: “The 4% Rule Could Cause You to Leave a Fortune on the Table or Run Out of Money Long Before You Die”

by

Todd Tresidder has written a super article about the evolution of our understanding of how safe withdrawal rates work at his Financial Mentor site. It is called Are Safe Withdrawal Rates Really Safe?

Juicy Excerpt #1: It is known as the “4% Rule”, and it is widely considered to be “the truth” in safe withdrawal rates for retirement. The problem is it’s not the truth and every day people risk a lifetime of retirement savings on it.

Juicy Excerpt #2: It is the single most important question I get from retirees and near retirees. The reason is because safe withdrawal rates impact every aspect of retirement planning — from the lifestyle you can afford to the amount of savings needed to fund it. Small errors in safe withdrawal rates multiply over many years causing huge financial impacts.

Juicy Excerpt #3: The key point defining all 2nd Generation research is that each study applies the same basic premises thus producing extraordinarily consistent results. This consistency caused the 4% Rule to become conventional wisdom and be mistaken as “truth” when it is really just a product of the research premises.

Juicy Excerpt #4: To understand the problems with 2nd Generation research we need look no further than the amazing breadth of dubious assumptions behind the results.

Juicy Excerpt #5: Rob Bennett was an early pioneer in 3rd Generation modeling by advocating (through various online forums) that withdrawal rates must be adjusted for market valuations consistent with research by Cambell and Shiller (1998). Also, Wade Pfau (2010-2011) broke new ground by applying safe withdrawal rates to international market data with shocking results. He also applied valuation, interest rate, and inflation metrics in regression analysis to form a dynamic and robust safe withdrawal rate model. The key point illustrated by 3rd Generation research is that a deeper level of complexity underlies the sacred cow “truth” known as the 4% rule. It was the best answer for its day, but those days are gone. It is a second generation model whose shortcomings have been proven well enough that it must be retired.

Juicy Excerpt #6: This problem is why 2nd Generation models chose to define the highest withdrawal rate that could survive all historical data periods. The assumption was the best and worst performing periods could not be determined in advance so the only safe choice was the lowest common denominator that survived all time periods. Fortunately, that assumption is false. Future investment returns are not “luck” or random as many would guess. As it turns out, market valuations at the time you begin your investment holding period are inversely correlated to the return you can expect over the following 10-15 years.

Juicy Excerpt #7: The reason I focused on the 2nd Generation model is because it has been elevated to the status of “truth” in the financial planning industry. The 4% Rule is quoted regularly in the financial media and used as a benchmark by which all other retirement planning models are compared. The problem is it’s not really safe. The 4% rule could cause you to leave a fortune on the table or run out of money long before you die. The 4% rule is a static conclusion in a world that is dynamically evolving. In summary, there are specific assumptions built into the research supporting the 4% model that must be seriously questioned.

Beyond Buy-and-Hold #54 — Your Retirement Plan Is In More Trouble Than You Realize

by

I’ve posted Entry #54 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Your Retirement Plan Is In More Trouble Than You Realize.

Juicy Excerpt: Stocks were so insanely overpriced in the late 1990s that even 12 years of zero returns has not been enough to pull valuations back to where they must go for the stock market to generate good returns on a going forward basis. We are today at the valuation levels that in ordinary circumstances would be causing informed investors to start preparing for a crash.

If you think that the hit you have taken over the past 12 years has been tough to bear, you ain’t seen nothing yet! Stocks don’t become a good investment class again until we see capitulation. You don’t hear people saying good things about Buy-and-Hold when they are preparing to capitulate. There are still lots of Buy-and-Holders around today. We are nowhere close to capitulation yet.

VII #46 — It’s Not Always a Good Idea to Lower Your Stock Allocation As You Age

by

I’ve posted Column Entry #46 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Not Always a Good Idea to Lower Your Stock Allocation As You Age.

Juicy Excerpt: The full reality is that aged investors are better sticking with high stock allocations at times of moderate and low prices and all investors (not only aged investors) should be going with low stock allocations at times of high prices. Should age then not be a factor that investors consider when setting their stock allocations?

I think age should be a factor. The error in the conventional wisdom is in overstating the importance of this consideration while understating the importance of valuations. At times of moderate valuations the relatively small consideration of whether the investor will have enough years before his retirement to recover from losses suffered looms more important.

Wade Pfau: “Perhaps the Trinity Study Was Not Meant to Be a Safe Withdrawal Rate Study”

by

Set forth below are some words that Wafe Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, put recently to the blog entry here titled Everyone in This Field Should Be Urging the Authors of the Studies to Make Corrections:

Rob,

Perhaps the Trinity study was not meant to be a “safe withdrawal rate” study. The word “safe” does not appear in either the original or updated versions. Perhaps the study was only meant to point out that 6-7% withdrawal rates are not safe. So my list of concerns in my updated blog post is meant to point out what I feel are issues that users of the study must consider before jumping to the conclusion that the study provides information about “safe withdrawal rates” for the future. Though I feel they could be more vocal about this matter, the Trinity authors never really gave any indication that forward looking retirees should treat 4% as safe. It’s up to our interpretation as users of their findings.