Schroeder posted a comment to yesterday’s blog entry that I believe merits a blog entry of its own in response. His comment came in response to my observation that the Bogleheads wiki statement on safe withdrawal rates (SWRs) contains a link to an Old School SWR calculator but not to the only New School SWR calculator now available on the internet. Here is what he said:

“Actually, there are several links to Old School SWR studies. They have been authored by financial planning professionals and published in peer reviewed journals.

“Rob, you need to do the same. For you and your New School SWR studies to gain a measure of credibility, they need to be embraced by the financial planning community — both by practitioners in the field and journals read by both practitioners and academics.

“Another idea is to partner with someone who does have that credibility. I realize that the partners you have petitioned like Scott Burns and Jonathan Clements have not given you a warm reception. But surely, there must be others, right? How about Robert Shiller? That’s just one name that comes to mind. I’m sure you can think of dozens of other practitioners and academics who will partner with you.”

Schroeder is correct that there are many financial planning professionals who have endorsed the Old School SWR studies. This is an important fact and it is good that we remind those following our discussions of this reality from time to time.

Schroeder misstates the realities of what happened in my discussions with Scott Burns and Jonathan Clements.

Clements said that the Old School studies are “not the last word in SWR analysis,” in his view. That is obviously not an endorsement of the Goon position that posting on the flaws of the Old School studies should be banned at all Retire Early and Indexing boards. If the Old School studies are not the last word, we obviously should be seeking to learn how to enhance our understanding of SWRs.

Clements did not endorse The Retirement Risk Evaluator. But I think it would be fair to say that he endorsed the position of the thousands of community members who have expressed a desire that honest posting on the SWR topic be permitted on our boards. He is saying that we need to learn more. We obviously cannot learn more until the ban on honest posting is lifted.

For community members to be able to interact in an honest and informed way, they obviously need to know how the Risk Evaluator works and what it says. Hence, we need to see links to this tool in places like the Bogleheads wiki statement on SWRs. Clements is saying that we need to continue the learning process and the failure of the people who control what is put in the Bogleheads wiki statement to include a link hinders the learning process in a very serious way. It is the people who control what is put in the Bogleheads wiki statement who are rejecting what Clements has said on SWRs, not me (I of course look forward to the day when Clements goes a step further and endorses the Risk Evaluator).

Burns has written three columns on the New School research done by John Walter Russell. Mel Lindauer (co-author of The Bogleheads Guide to Investing) has compared those articles to the work of a journalist on the crime beat who reports on the actions of a serial killer. I don’t buy it. It is clear to me from the wording of his columns that Scott has reported on the New School findings because he sees great value in them. I am influenced by the fact that Scott has told me in private e-mail correspondence that he believes that John and I are right in what we say about SWRs. So Schroeder’s claim that Burns has not responded warmly to the New School concept (it was Burns who coined the “New School” terminology to make reference to our findings) is obviously more than a little bit off the mark.

The other side of the story is that Scott also has not endorsed the Risk Evaluator and Scott has indeed put forward some unkind words about me. He has described my efforts to get the Old School SWR studies corrected as “catastrophically unproductive.” He has said that “the whole idea that there is a new school of Safe Withdrawal Rates reeks of personal aggrandizement.” Yes, the guy who came up with the term “New School” mocks it. Beat that one in the irony department!

There is not one Scott Burns. There are two. If there were only one, the part of Scott Burns’ brain that understands that valuations affect SWRs and that the Old School numbers are thus wildly off the mark would tell the part that writes the column in the Dallas Morning News that millions of retirements are at risk of going bust and that this is the biggest story of his lifetime and that he had better get to work pumping out some columns.

And there is not one Jonathan Clements. There are two. If there were only one, the part of Jonathan Clements’ brain that understands that the Old School studies are not the last word in SWR analysis would be asking Rob Bennett for the details of the Campaign of Terror that has been used to block honest discussions of the need for improvements in the old SWR studies so that he could write the story up in The Wall Street Journal (now that Clements is no longer employed there, he would instead send an e-mail to one of his friends there tipping them off to the story that I let him know about in an e-mail).

This strange phenomenon in which the human personality is divided into two has not affected only Scott and Jonathan. I wrote a blog entry a little while back about something that happened to Rob Arnott (editor of the Financial Analysts Journal) at a recent conference of the sort of people who spend their working days constructing peer-reviewed SWR studies. He asked the group of 200 “experts” how many of them believed in the Efficient Market Theory. Not one raised his or her hand. He asked how many would be rooting the research they would be preparing when they got back to the office on Monday morning in the premises of the Efficient Market Theory. Nearly every one of the 200 raised his or her hand.

These are the people that Schroeder is telling me to contact for help with my credibility?

In the investing field?

Um — I think I might stick to the track I am on today. There’s lots of wonderful stuff done in the world of academia. There’s also a lot of gibberish produced in that world. My job is to sort out the good from the bad and report to you what I discover. My intent is to continue to do that job to the best of my ability and let my credibility take care of itself. I have a funny hunch that, given that I have discovered through that process that the Old School studies are wildly wrong, it does more for my credibility to report what the New School studies say than it would to endorse the Old School studies.

The reality is that there are scores of peer-reviewed studies that show that valuations affect long-term returns, probably hundreds. There is nothing that I have said about the investing realities that hadn’t been said thousands of times before I came along. And of course there are academics who report the realities. Another recent blog entry reported on a Capital Spectator article noting that: “a new generation of researchers took a fresh look at the random walk in the 1980s and 1990s and the accumulating tide of studies began to turn the academic tide.” More serial killers on the loose!

Valuations have been affecting long-term returns since long before the first Old School SWR study was a gleam in the eyes of the Trinity Study authors. Nothing has changed in recent years but the P/E10 value. When the P/E10 value is 24 (the number that applies today and one of the highest on record), it’s viewed as “rude” to comment on how stocks have performed since the beginning of time. It’s viewed as “kind” to tell people the sorts of fairy tales set forth in the Old School studies.

So be it.

But I’m not in the fairy-tale telling business. I write for people. When I click my words onto the computer screen, I have the image of a real live middle-class man or woman in mind as the person to whom I am directing the thoughts. The people who read my stuff matter to me. They have college educations to fund, retirements to finance, dreams of more fulfilling work that they could pursue if only they had a bit more money. I am going to tell the story straight to those people, smear attacks on my credibility be darned.

I understand Scott’s point that what the historical data says on SWRs is “information most people don’t want to hear.” That doesn’t matter to me. Or at least it doesn’t matter to me enough to make me go along with the idea that telling the story straight is “catastrophically unproductive.” I will post honestly or I will post not. There’s zero give on that one.

So I will continue to do my thing. John Walter Russell will continue to do his thing. Mel Lindauer will continue to do his thing. John Greaney will continue to do his thing. Schroeder will continue to do his thing. Scott Burns will continue to do his thing. Jonathan Clements will continue to do his thing (at a new place since he left the Journal recently). Life will go on, ob-la-di, ob-la-da.

The historical data will continue to say what it says. There is no Smear Campaign that can change that. The authors of the Old School studies got the number wrong, wildly wrong. Their error will cause millions of busted retirements in days to come in the event that stocks perform in the future anything at all as they have always performed in the past. And when we ask them to make corrections, we will hear word games in response. Har-de-har-har.

I write for people with a sincere desire to learn how to save and invest effectively. Thousands of them have expressed a desire that honest posting be permitted on our boards. I urge them to do what it takes to see that desire brought to fruition. It is these people, not the Goons, who built our boards. These people deserve better than they are getting today. A lot better.

I will continue to report accurately what the historical data says re SWRs. Deal with it, Goons.

Today’s Passion: The many community members who would like to see honest posting on SWRs permitted at our boards sound off in an article entitled Community Comments on Using Historical Data to Diminish Retirement Risks.

We enter Year Five of The Great Safe Withdrawal Rate Debate at 10:40 AM (Eastern Time) on Saturday. Here are three topics that I hope we will see explored in more depth during the next 12 months of our community discussions:

1) We know that middle-class participation in the stock market increases in Bull Markets and diminishes in Bear Markets. Thus, many middle-class investors never see in real life the juicy returns promised on paper to long-term buy-and-hold investors. To what extent can the effect of this reality be measured statistically? Is the true safe withdrawal rate for those who go with high stock allocations at times of high valuations a good bit lower than even the numbers being reported by analyses that make adjustments for valuations (but not for sales of stocks made after prices drop)?;

2) When middle-class investors sell, what group of investors is it that is doing the buying? Is there a small group of wealthy, valuation-informed investors that buys up the shares no longer wanted by middle-class investors who went with excessively high stock allocations at times of high prices? Do corporations buy back shares that they issued at higher price levels, increasing the value of the shares held by investors who do not sell?; and

3) How valid are concerns that those following the Valuation-Informed Indexing approach may “miss out” on the strong returns generally available to stock investors by lowering their stock allocations at times of high valuations? Does there come a point at which an investor would have been better off having maintained his higher stock allocation even after taking into account the substantial losses he suffers by doing so when valuations return to moderate levels?

A recent thread on the Morningstar discussion board on “Investing During Retirement” provides a good sense of what we’re up against in our effort to get the publishers of today’s retirement planning tools to correct the grave flaws in them that we have uncovered in recent years.

The thread was started by a poster who goes by the screen-name “bob09245.” Bon owns the “Bob’s Financial Website” site and is a popular poster at the Morningstar boards.

I saw that Bob had provided a link at his site to the FIRECalc retirement calculator (a calculator based on a conventional- methodology safe withdrawal rate study) and so I asked him if he would be willing to also put up a link to materials explaining why the conventional methodology numbers are so far off the mark from the numbers obtained from any of the analytically valid safe withdrawal rate methodologies.

Bob doesn’t dispute our finding that changes in valuation levels have a big effect on long-term stock returns. His view is that this finding “intuitively makes sense.”

So Bob supports our effort to let aspiring retirees know of the dangers of today’s “highly misleading” (William Bernstein’s phrase) retirement planning tools, right?

Well, actually, no.

If anything, my sense from reading the thread is that Bob is hostile to the idea of correcting the false safe withdrawal rate claims put forward in studies and calculators that he links to at his site. It sounds to me as if Bob thinks it is just fine that millions of retirements are going to go bust because of the flaws in today’s tools (I am assuming here that stocks may perform in the future somewhat in the way in which they always have in the past).

The story gets even stranger.

One of the things that seems to bother Bob about our initiative is that I am leading it and that I acknowledge that I am about as far removed from being a Numbers Guy as it is possible to be. It appears from the comments he makes in the thread (and from the materials published at his web site) that Bob is a bit of a Numbers Guy. Intuitively, I would expect a Numbers Guy to be more upset about studies reporting demonstrably false numbers. But it is me, the non-Numbers Guy, who comes across in the thread as being far more concerned.

You figure it out.

There are a number of good posts put forward in the thread by a number of people making reasonable, commonsense observations. One that shocks and astounds and amazes me (given what is said elsewhere by the same poster) is a comment put forward by a poster using the screen-name “Jason375.”

Jason argues that, given the increases in S&P valuations we saw in the late 1990s, it would have been “foolish” for any retiree to have believed that a 4 percent withdrawal rate was safe for a high-S&P portfolio used in a retirement beginning in early 2000. So Jason is offering us whatever help he can to advance our effort to get out the word about the studies that were telling investors at the time that this foolish (and exceedingly dangerous–the data shows that retirees who put their confidence in what the conventional studies said was safe in January 2000 have a better than 50 percent chance of going bust in days to come) move was in fact “100 percent safe” (yes, there are indeed retirement planning tools on the market today that make this transparently absurd claim).

Well, actually, no.

Jason asks elsewhere in the same post: “How can one be so certain that 4% is wrong….?”

Huh?

Those using the studies to plan their retirements are “foolish” for doing so, but the authors of the studies are possibly not in the wrong to put forward the highly misleading and highly dangerous claims they put forward in them? This takes the concept of blaming the victim to a whole new level.

Again, you figure it out.

The poster named “Gnobility” offers us a third illustration of what we are up against in trying to get the word out on the flaws of the dangerous conventional methodology studies and calculators. Longtime Financial Freedom Blog readers will recall that I wrote about Gnobilitys Retire Early plan in my December 12, 2005, blog entry.

Gnobility was kind enough to post for the benefit of the community a PDF document that was a 19-page write-up of his personal Retire Early plan. He said that the reason he put up the post was to get feedback and use it in conversations with his wife in which they would work the plan just a little bit harder.

Gnobility used conventional methodology numbers in his plan. I let him know that this is a dangerous thing to do. I did for the guy what he was hoping some fellow community member might do for him–I gave him constructive feedback on a point that, unless he corrects it, stands a good chance of causing his plan to fail in days to come.

So when a post with Gnobility’s name on it appears on the thread, it is to thank me for helping out a fellow community member in need, right?

Well, actually, no.

I think it would be fair to describe the words that appear in the post with Gnobility’s name on it as exceedingly strange, given the history between us.

Again, you figure it out.

If you come up with anything good, please let me know.

So said “imfelbi” in a post to the Motley Fool board in the very earliest days of The Great Safe Withdrawal Rate Debate. One of our Numbers Guys had done a sensitivity study showing that the results of the conventional-methodology studies are highly unreliable. Imfelbi argued that: “I would rather work a few more years than cut it so close.”

Today, imfelbi has another choice. Today, we know how to calculate safe withdrawal rates accurately. That’s part of the message that we want to get out through the “Save the Retirements!” initiative too.

Here is a list of ten important insights that we developed in the first 45 months of our discussions:

1) Timing Doesn’t Work. You no doubt already know this. But do you know why timing doesn’t work? Many people believe that the reason why timing doesn’t work is that stock returns are unpredictable. Not so. Stock returns are highly predictable. So why does timing not work? Because it takes years for the laws of probability to assert themselves. Just as it is possible for the house to lose money to a gambler who pulls a slot-machine lever only ten times, it is possible for overvalued stocks to go even higher (or for undervalued stocks to go even lower) over the course of one or two or three years. In the long run, though, valuations matter big time.

2) Timing Works. In confirming the finding that short-term timing doesn’t work and determining why that is so by studying the historical stock-return data, we learned something far more important — go out far enough for the laws of probability to assert themselves and timing does work. So you can’t know in advance how stocks are going to do in the next one or two or three years. Who cares? We are long-term buy-and-hold investors. We want to know how stocks are going to do in 10 or 20 or 30 or 40 years. Within a reasonable margin of error, we can.

3) Stocks Are Safer Than Most People Think. Most investors do not know that long-term timing works. That means that most investors are taking a gamble with their money when they invest in stocks. There’s no need to gamble. So long as you are a long-term investor and so long as you invest in index funds, you can have a darn good sense on the day you make the investment of what sort of long-term return you are going to obtain. That’s cool.

4) Stocks Are More Risky Than Most People Think. The other side of the story is that there are times when the long-term returns likely to be obtained by purchasing an index fund are not so hot. Stocks are generally less risky than most people think. But at times like today, stocks are more risky than most people think.

5) Stocks Are Like Cheerios. It turns out that stocks are like just about any other asset you can purchase. Those of us seeking financial freedom early in life know that the key is making good use of our money. We buy cars just like everybody else, but we aim to obtain a strong value proposition when we do. We buy houses just like everybody else, but we aim to obtain a strong value proposition when we do. Now we know to apply the same logic to our stock purchases.

6) It’s All About Income Streams. Much of what you hear about stocks in the general media is noise. Experts go on and on about all sorts of issues, but the end result often is to leave you more confused about what to do with your money than you were when you started. Our safe withdrawal rate research has taught us to focus on income streams. The purpose of investing is to provide you an income that you can live on separate from the income you earn from the work you do. Focus on income streams, and you can make sense of the investing project.

7) Cash Is A Strategic Asset Class. Lots of people make fun of those who invest in things like ibonds and TIPS. Not us aspiring early retirees. We know that putting some of our money in cash when stock prices are high permits us to buy more stocks when prices are better. Putting cash to strategic use allows us to win financial freedom years or even decades sooner than would otherwise be possible.

8 ) The Biggest Risks Are Emotional In Nature. You often hear experts say that, to obtain a strong return from your investments, you need to be willing to take on risk. Yes and no. You do need to be willing to take on some risk. But the biggest investing rewards go to those able to gain sufficient control over their emotions not to overreact when stock prices get too high (by buying too much stock) or when stock prices get too low (by selling too much stock). Use our findings from the historical data to rein in your emotions, and you can enjoy better long-term returns than those who take on far more risk (by buying lots of stock when prices are high).

9) Stocks Really Do (and Do Not) Provide a Real Long-Term Return of 6.8 Percent. Many stock investors take comfort in claims that stocks provide a long-term real return of 6.8 percent. That’s so. For stocks purchased at times of high valuation, however, it can take a long time to get to that 6.8 percent return. If you only expect to be alive for another 30 or 40 years, it may not happen in your lifetime. The historical data can give you an idea of how long it is going to take to attain whatever return you are seeking from stocks. That’s a big help for those putting together plans to live off the income streams generated by their investments.

10) Dividends Matter. When retirements fail, it is usually because the retiree had to sell stocks when prices were down to cover his living expenses. Stocks that pay good dividends provide a regular income stream that gets you through the down times without having to sell shares. Dividend-paying stocks are a different sort of investment class than non-dividend-paying stocks, one that allows investors to enjoy the good side of stocks while avoiding much of the bad side.
Let’s get about the business of taking our exciting findings of recent years to the Big Bad World outside of the friendly confines of the Financial Freedom Community discussion boards.

Save the Retirements!

That’s a phrase that appeared in a post to the Early Retirement Forum put up by a poster named “Mikey.” (He now uses the screen-name “HaHa”).

I thought that was a good way of pointing out how lame the arguments are that are used by defenders of retirement planning tools based on the findings of conventional-methodology safe withdrawal rate studies. Here is a list of ten of the arguments most frequently advanced by defenders of today’s highly misleading and highly dangerous retirement planning tools, along with my thoughts on why those arguments are less than persuasive:

1) No one puts any confidence in the numbers generated by retirement planning tools. If that were so, why would people bother to produce them? Why would people go to web sites looking for them?

2) People don’t rely solely on the flawed tools in planning their retirements. That’s so. But how does that justify misleading people as to what the historical stock-return data says about safe withdrawal rates? It doesn’t.

3) The tools are only meant to provide rules of thumb. Even accurate tools only provide rules of thumb. No methodology is so powerful that it allows us to see into the future. Still, reports of what the historical data says should be accurate.

4) Everybody provides false numbers in their retirement planning tools. We all have mothers who have pointed out to us the flaws of the “everybody else is doing it!” defense. It’s not so, in any event. William Bernstein reported the safe withdrawal rate accurately in his book. Scott Burns reported it accurately in his column. John Walter Russell reported it accurately at his web site.

5) The people saying that valuations matter might be wrong. All of them? All wrong? Peter Bernstein got it all wrong? And Rob Arnott got it all wrong? And Scott Burns got it all wrong? And John Walter Russell got it all wrong? And William Bernstein got it all wrong? And Andrew Smithers got it all wrong? I don’t think so. All of these people no doubt have gotten some things wrong. But if any of them are right even on the basics of the safe withdrawal rate topic, most of today’s retirement planning tools need to be fixed.

6) If we report the numbers accurately, we will get complaints from people who would like the numbers to be higher. This is an argument that Bill Sholar, publisher of the FIRECalc retirement calculator, pulled out of his trick bag in a discussion recently held at the Early Retirement Forum. The entire point of using historical stock-return data to determine what is safe is to root your retirement plans in something objective. Retirement planning tools that rely on public opinion polls to determine what withdrawal rates are safe are not the products of science. They are the products of science fiction.

7) Retirees can cut back on spending when their retirements look like they are going to fail. The point of planning a retirement is to avoid the need for big spending cutbacks after you hand in your resignation. Planning tools should not be designed so that cutbacks are going to be required in the event that stocks perform in the future much in the way in which they always have in the past.

8 ) People are not prepared to accept what the historical data really says about the long-term returns likely to be provided by stocks purchased at times of high valuations. This is true to a point. But it is not entirely so. We have heard hundreds of Financial Freedom Community members express a desire to know the realities of what the historical data says. In any event, it is better for people who are over-invested in stocks to deal with whatever emotions they experience in learning that when they still have the option of selling some shares at good prices.

9) People will lose hope that they will be able to retire if we use accurate numbers in our retirement planning tools. Not so. The historical data shows that retirees willing to make adjustments in their stock allocations can obtain a safe withdrawal rate of 4 percent even with stocks at the valuation levels they are at today.

10) There’s a chance that the retirements that are being planned based on the flawed retirement planning tools will survive anyway. This is so. However, it does not justify telling aspiring retirees that withdrawal rates that are risky are safe. The words “safe” and “risky” are not synonyms. They are antonyms.

Mikey got it right.

I explained in yesterday’s blog entry that it has been four years since William Bernstein drew our attention to the grave flaws in most retirement planning tools. The tools have been proven dangerous to the aspiring retirees who make use of them. We need to get them fixed or taken off the market altogether.

How do we get from where we are today to where we need to be?

I noted yesterday that it is not one or two or three retirement planning tools that are flawed. It is most of them. There are scores of calculators and studies reporting bad numbers to aspiring retirees. We need to get them all off the market.

It sounds like quite a challenge, and it is certainly fair to say that this effort is going to take a good bit of time and a good bit of work. I don’t think that our “Save the Retirements!” initiative will turn out to be quite so daunting an endeavor as it might appear to be on first impression, however.

We have been discussing the flaws of the retirement planning tools for fours years now in the Financial Freedom Community discussion boards. In all that time, no one has come up with a single reasoned argument or a single sliver of historical data supporting the la-la land assumptions used in these calculators and studies. How then is it that the tools have not already been taken off the market?

The thing that has kept the false studies and calculators around for so long is that there are so many of them. Ask the creator of Tool A to report what the historical data says accurately, and he says: “Oh, there are lots of other tools saying just the same thing.” Ask one of the others to fix his tool, and he says: “Hey, Tool A says just the same thing, why should I be singled out?”

The flawed retirement planning tools today all stand together, and the flawed retirement planning tools someday will all fall together. Persuade the creator of one or two of these tools to make the necessary corrections, and all of the others will feel exposed. Fix one inaccurate calculator, and you fix them all. Fix one inaccurate study, and you fix them all.

So we don’t actually need to fix scores of bad retirement planning tools. We only need to fix a few, and the ball will be rolling on its way to where we want it to go.

How do we get those first few studies fixed?

It’s not going to happen as the result of me insisting on action in my blog entries. We need the sort of pressure that can be brought to bear by getting big-time publicity directed at the problem. We need an article on the front page of the Wall Street Journal or the New York Times.

That’s not something we can pull off in a day or a week or a month. You don’t get two chances to pitch an idea to a reporter for the Wall Street Journal. We need to build our case until it is absolutely rock-solid and absolutely clear and absolutely compelling. When the case is strong enough, then we pull the trigger and contact a reporter at the Wall Street Journal and watch the dominos start to fall.

I don’t mean that we need to build our case on the merits. That case is rock-solid today. What we need to do is to think through how best we can present the case to make the story compelling to readers of the Wall Street Journal. What is it that the typical reasonably informed investor most needs to know about the flaws of today’s retirement planning tools? How can we illustrate the problem so that the importance of the story can be conveyed in the fewest possible words?

Answering those questions should be our focus for the next few months. First, we determine how it is that we need to present our case. Then we make a few test runs, getting our story placed in smaller and more accessible media outlets. Then we take our “Save the Retirements!” story to The Big Show.

It’s time for a product recall. Let’s all put our heads together and come up with some creative ideas for getting the word out to the people who most need to be warned of the dangers of today’s highly misleading and highly dangerous retirement planning tools.