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

Academic Researcher Wade Pfau: “The Reason I Contacted Them [the Authors of the Trinity Study, an Old School Safe Withdrawal Rate Study) Was To List Some Concern I Had (Valuations, Fees, 30-Year Time-Period) About Whether the Results of Their Study Are Applicable for Recent Retirees. I DIdn’t Think the Trinity Study Is Helpful for Recent Retirees. Now, I Think Even More Strongly Than Before That the Trinity Study Is Not Helpful.”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on April 7, 2012. I sent a follow-up e-mail one hour later. The text is set forth below.

Wade:

I thought of a way to reduce the long response I sent a few minutes ago to something much shorter. So I thought I would pass that along. Then I promise to shut up.

You sent an e-mail to the Trinity authors asking them to correct their study.

Why?

Rob

Wade responded the same day. He said: “‘I’m glad to see you’ve pulled back your troops as it seemed you’ve been trying to start a war with me when we really have nothing to be fighting about.”

The e-mail continued: I” don’t have any problem with what you wrote in your last message, except that I have a slightly different view about the issue of correcting old studies. The way I think that is best done is to provide new research to replace the old research. On the issue of old school SWR studies, that is what I tried to do with my August 2011 Journal of Financial Planning article. Now it is just a matter of getting the word out about it, and the results from that article have been featured in the Wall Street Journal and SmartMoney. In June I’ve been invited to speak to a group of high level people from a bunch of different finance companies about this same topic. I’m doing what I can.”

Wade explained: “You asked about why I contacted the Trinity authors. I’m not sure why you even feel a need to ask. It seems like you’ve decided in your mind that I’m a Goon when I’ve not changed my outlook on this or any other relevant issue. The reason I contacted them was to list some concerns I had (valuations, fees, 30 year time period, etc) about whether the results of their study are applicable for recent retirees. I didn’t think the Trinity study is helpful for recent retirees. Now, I think even more strongly than before that the Trinity study is not helpful.

He concluded: “This is why I’m so confused about your attitude toward me since the Bill Bengen incident.”

Academic Researcher Wade Pfau: “This Issue Shouldn’t Really Even Be All That Controversial. It’s Just Common Sense That the Probabilities From the Trinity Study Shouldn’t Be Interpreted As Forward-Looking Probabilities for New Retirees.”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on May 17, 2011. Wade responded the next day.

He said: “It seems that the goons let the post by without too much complaint. Actually, this issue shouldn’t really even be all that controversial. It’s just common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees.” My response, sent the same day, is set forth below.

Wade:

I mean no personal criticism in saying this. You are in very good company. But you are missing the most important element of the story.

All overvaluation is the product of investor self-deception.

For stocks to be overvalued is for them to be mispriced. It is the market (investors) that sets the price. It can never be to our advantage to misprice stocks. So why do we do it?

When we misprice stocks, we are PRETENDING that our retirement accounts are worth more than they are.

OF COURSE it is common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees. Nothing could be more obvious. A six-year old child could see this.

So why don’t these highly educated, highly paid experts see it? Why have people been citing The 4 Percent Rule for years now?

Because it doesn’t PAY to see it. There’s more money to be made in pretending that we do not see the self-deception taking place. If we can fool people (and ourselves!) into thinking we don’t see it we escape the obligation of pointing it out.

The experts are every bit as much capable of self-deception as the investors are, Wade. So the experts have elected to pretend that it doesn’t matter whether the numbers we all use to plan our retirements add up or not. The term in the psychological literature for this phenomenon is “cognitive dissonance.”

When we overcome the cognitive dissonance, we all become able to MAKE USE of the wonderful research you and many others have done. Until that step is taken, discussions like those you engage in at the Bogleheads Forum go around and
around in circles. Nothing can be brought to a constructive resolution until there is a DESIRE to get the right answers. As of this moment the desire of most is to keep the cognitive dissonance going (because most have participated in it and suffer from it).

The job is to CHANGE that. The job is to get things to a place where we can all openly ACKNOWLEDGE that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees. We have known the realities in an intellectual sense for 30 years. We need to move to a place where they can be spoken out loud and the millions of middle-class investors who don’t have time to check these things out for themselves can properly depend on the community of experts to report the realities accurately and honestly and realistically.

This is the point I am making when I say that we need to permit honest posting on safe withdrawal rates and on many other important investment-related topics at every board and blog on the internet. That’s the entire ball of wax. There is not one investor alive who does not want to know how to invest effectively. Once we gain recognition of our right to post honestly, the whole thing  goes viral and we can bury Buy-and-Hold 30 feet in the ground where it can do no further harm to humans and other living things.

That’s when those fine studies of yours end up on the front page of the New York Times, where they belong!

And that’s when all the Buy-and-Holders receive the credit they merit for laying the foundation for the first data-based investing strategy that works in the real world!

The Goons didn’t do anything because the Goons grow weaker with each passing day. The problem with Get Rich Quick strategies is that they cause great human misery. As the misery of the Buy-and-Hold “strategy” spreads, the Goons run out of supporters. They don’t have arguments. So, when they run out of supporters, they are lost.

All of this has gone on in every earlier Bull/Bear cycle. What makes this  one different is that this is the first time that Post Archives are being kept of each word that is said and this is the first time that we are all able to watch it all play out before our eyes on our computer screens in real time.

Yes, it’s scary.

But it’s also exciting as heck to think what we will be able to do once we do gain recognition of that right to post honestly. You need to run the numbers, Wade. They won’t be calling it “the Dismal Science” after we gain the ability to report the numbers accurately. Instead of putting it to use to destroy millions of lives, we will be putting economics to use to ENHANCE millions of lives.

I have a funny hunch that it is to be involved in that sort of project that you got into this field in the first place. You just didn’t know it was going to be so contentious. Neither did I. Neither did any of the hundreds of others who have worked up the courage to speak up. We are all on the same side and we are all facing the same obstacles and we all are feeling the same hopes that the future will be a whole big bunch better than the recent past.

The words you put to your blog are top-notch stuff. They are extremely helpful. You have put forward tons of top-notch stuff that is extremely helpful. Please just keep at it. If you do, over time more and more of this will become clear to you. I took a sneak peak at the last page of the story before I dared to put up that May 13, 2002, post. I think it would be okay to let you know that the good guys win in the end.

The bad guys win too, actually. It’s just that in their case they have to be forced to accept the win over their kicking and screaming.

Humans!

Rob

Wade Pfau: “Bennett Desperately Wants Someone Besides Him to Say That the Trinity Study Needs to Be Corrected, But I’ve Explained That This Isn’t How Research Works”

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Academic researcher Wade Pfau has posted a blog entry making a remarkable claim — John Greaney was right all along in his safe withdrawal rate claims and Rob Bennett caused all the trouble by not promptly acknowledging this! The blog entry is called Valuations and Withdrawal Rates.

Juicy Excerpt #1: Yes. If you want to keep using 4% it is up to you, but what was ultimately shown by people applying Campbell and Shiller’s regression methodology to this question is precisely this outcome suggested by intercst. This is the end of the debate. So what have people been discussing for the past 10 years? I think the answer lies in the misstep hocus took in his follow-up reply later that afternoon.

Juicy Excerpt #2: Current conditions matter more than historical averages, stocks are risky even over the long term, and markets are unpredictable.

Juicy Excerpt #3: 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. The worst-case that showed up during this time can hardly be expected to be representative of the future.

Juicy Excerpt #4: He just finished explaining why we don’t have enough data to have a good understanding about the full range of potential outcomes, and then he wants to torture the data more by trying to define different safe withdrawal rates for different valuation levels based on even more limited subsets of data? Though creative, it doesn’t work.

Juicy Excerpt #5: I do think valuations may help gain insights about what the withdrawal rate will be, but this certainly does not make the estimates safer.

Juicy Excerpt #6: Hocus desperately wants someone besides him to say that the Trinity study needs to be “corrected,” but I’ve explained that this isn’t how research works. Rather, new studies with new methodologies come to replace old studies. This is a case, however, in which old studies were already available to suggest that we shouldn’t project the findings of the Trinity study forward to future retirees.

Juicy Excerpt #7: A number of leading financial economists (including Zvi Bodie, Laurence Kotlikoff, Moshe Milevsky, William Sharpe, and others) have condemned the 4% rule. Financial economists do not respect the Trinity study for a variety of reasons.

Juicy Excerpt #8: Just as historical withdrawal rate outcomes don’t guarantee future safety, the relationship between valuations and withdrawal rates can change as well. We are still prone to black swans.

Juicy Excerpt #9: Past is not necessarily prologue. Don’t treat the predictions coming from a model incorporating valuations as a guaranteed annuitization rate from your portfolio, especially when trying to extrapolate outcomes when valuations reach previously unseen levels. Trying to estimate safe withdrawal rates after incorporating valuations does not “correct” anything. End of story.

There was a discussion of Wade’s post at the Goon Central board. The thread is titled Wade Pfau Sets Hocus Straight.

I posted the following words as a comment to the blog entry, but Wade deleted them:

Hocus desperately wants someone besides him to say that the Trinity study needs to be “corrected,” but I’ve explained that this isn’t how research works.

This is shameful stuff, Wade. I am very disappointed in you.

You’ve visited the Motley Fool’s Retire Early board. If you look at more than that single thread, you will see that there were threads appearing at that board on a daily basis in which my fellow community members were relying on the 4 percent rule to plan their early retirements. Those people are in very bad shape today. Not because they did anything wrong. They did the right thing. They checked the research. The research told them that their early retirements were “100 percent safe” (that’s the phrase used in Greaney’s “study”). We owe those people nothing, according to Wade Pfau. Rob Bennett very much does not agree.

Was a retirement that began in January 2000 and that took a 4 percent withdrawal safe or was it not? There are 20 places in your words above in which you indicate that you don’t think it was safe. And yet there is no need for a correction in the studies that caused millions of middle-class people to believe they were doing something safe when they were in fact doing something wildly risky?

I don’t know precisely what the ethical standards in your profession call for in this sort of situation, Wade. My common sense tells me that there are standards that address this sort of behavior. You know about the death threats and defamation and other intimidation tactics that Lindauer and Greaney have been employing for 10 years now to silence discussion of these questions. You shouldn’t be aligning yourself with them in any way, shape or form, I know that much for certain.

If Shiller is right (and there is now 30 years of research backing up his findings), we are in the early days of this economic crisis. We have another 65 percent price drop ahead of us. People are not going to find the safe withdrawal rate “joke” so funny when we are all living through the Second Great Depression.

I have the greatest possible respect for the research you did on the effect of valuations on long-term returns. I have told you that I think it merits a Nobel prize and I stand by that assessment today. I have long considered you a personal friend and I cherish that friendship and I still call you a friend today.

But today I need in conscience to say that you are a friend of whom I am ashamed.

I of course wish you the best in all your future endeavors and hope that there comes a day when we will be able to look back at these sad and difficult times and laugh at the foolishness we displayed in our behavior at the time. Please take good care.

Rob

Associate Professor Wade Pfau Has Contacted Trinity Study Authors re Analytical Errors in Their Safe Withdrawal Rate Study

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Wafe Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, has sent an e-mail to the authors of the famous (infamous?) Trinity study of safe withdrawal rates for retirees asking the authors whether it was their intent when preparing the study to identify the safe withdrawal rate for retirees. Here are his words:

“Okay, I took care of it. I was a little timid about contacting them, as I was publicly critical of their study in the past. But first I apologized to them for that. Then I explained my concerns about 4% for retirees since the mid-1990s. Valuations was a part of my list. I’ve even invited Prof. Walz to give a seminar at my university, as he is in Hong Kong during the spring term. This matter is settled.”

There’s been a debate raging on the internet re this question for nine years now. The debate is referred to as “The Great Safe Withdrawal Rate Debate.”

Numerous discussion boards and blogs have banned honest posting on the safe withdrawal rate matter after seeing the rage (which has at times evidenced itself in death threats, defamation and long-ongoing internet harassment campaigns) evidenced by those who believe in the Buy-and-Hold investing strategy when accurate reports of the safe withdrawal rate are posted. Buy-and-Holders view accurate reporting of the safe withdrawal rate as a threat to the dominant model for understanding how stock investing works.

The reason why the Old School safe withdrawal rate studies do not include an adjustment for valuations is that they are rooted in a belief in the Efficient Market Theory (developed by University of Chicago Economics Professor Eugene Fama), an academic construct that posits that the community of investors always considers all factors bearing on stock prices when setting stock prices and that overvaluation and undervaluation are thus logical impossibilities. Yale University Economics Professor Robert Shiller discredited the Efficient Market Theory (and the Buy-and-Hold strategy rooted in a belief in its principles) with research done in 1981 (and replicated many times in the three decades since) showing that valuations affect long-term returns. If valuations affect long-term returns, both overvaluation and undervaluation are obviously real phenomena.

Pfau has expressed numerous concerns about the Trinity study but does not share my view that the study needs to be corrected.

My view is that the study needs to be corrected because the safe withdrawal rate is the product of a mathematical calculation and it looks very bad when investors hear two wildly different reports as to the results of that mathematical calculation. Common sense tells us that something fishy is going on when different people make such wildly different claims for the result of the same mathematical calculation.

Thus, the friction generated by this “controversy” (there of course is no genuine controversy over what the numbers say — the historical stock-return data is public information and anyone who has ever gone to the trouble to check the data has found that Shiller is right that valuations affect long-term returns, at least in the 140 years of historical data available to us today) cannot go away without a resolution of the question of whether valuations really do affect long-term returns or not. I think it would be wonderful if as a society we could explore all of the amazing breakthrough insights that follow from Shiller’s research (I write weekly about these insights in my “Valuation-Informed Indexing” column at the www.ValueWalk.com site) and that only becomes possible when we open investing boards and blogs to honest posting on safe withdrawal rates and other critically important investment-related topics.

Pfau’s view is that it is possible that the Trinity authors did not intend to identify the safe withdrawal rate. He points out that the study uses the phrase “sustainable withdrawal rate” rather than “safe withdrawal rate.” I do not see the significance of this point given that the two phrases signify the same thing. A sustainable withdrawal rate is a safe withdrawal rate and a safe withdrawal rate is a sustainable withdrawal rate. I presume that “safe withdrawal rate” became the popular term because it is shorter.

Pfau also notes that the Trinity authors properly identify the withdrawal rate that has always survived historically. The problem with this argument is that the thousands of us who have expressed a desire that honest posting be permitted have been saying since May 2002 that the entire “controversy” could be put to rest in seconds if the Buy-and-Holders would be willing to refer to the number generated by the Trinity study (4 percent) as the Historical Surviving Withdrawal Rate (HSWR) rather than the Safe Withdrawal Rate (SWR). The Buy-and-Holders have been unwilling to consider this idea. If it were to become widely known that the Trinity study and the other Old School SWR studies report the HSWR rather than the SWR, the millions of investors who need to know the SWR to plan their retirements would lose interest in those studies. The SWR has great value as a planning tool. The HSWR does not.

John Greaney, the author of the Old School SWR study that appears at the www.RetireEarlyHomePage.com web site, has started a thread at the Motley Fool Retire Early board (honest posting on the subject of early retirement is no longer permitted at the board) suggesting that Pfau may be denied tenure because he has crossed Greaney by asking the authors of the Trinity study a question about their intent in preparing the study. The intimidation tactic is typical of Greaney’s behavior going back to the morning of May 13, 2002, when I put a post to that same board (at a time when honest posting on early retirement was not only permitted but encouraged) pointing out the analytical errors in the Old School studies.

The encouraging news is that, while in the old days, there would within a few hours have been scores of posts put forward by Buy-and-Holders endorsing Greaney’s intimidation tactics, in this case Greaney’s post has gone unanswered. This is how change happens. There’s a famous post by Ghandi in which he observes something to the effect (I am paraphrasing) that “first they ignore you, then they ridicule you, then they attack you, then they say that everyone knew you were right all along.”

I think it would be fair to say that Pfau’s suggestion that perhaps the Trinity authors had never intended to identify the safe withdrawal rate brings us to the “then they say that everyone knew that you were right all along” stage of this particular “battle.” Let’s all pray that the Trinity authors are able to work up the grace and courage to say something in response that pushes the ball even a little bit farther ahead.

Heaven help us all!

“We Cannot Ignore the Harm Done to Millions by the Mistakes Made by the Authors of the Trinity Study. Doing So Will Cause a Political Explosion”

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Yesterday’s blog entry set forth some words put forward by researcher Wade Pfau in which he argued that there is no need for the Trinity authors to correct the errors made in their safe withdrawal rate study. Set forth below are the words that I put forward in response to Wade’s argument:

The error that was made was an analytical error.

It was not an analytical error that was made only by the Trinity authors. It was an analytical error that was made by John Bogle. And Bill Bernstein. And the editors of Money magazine. And by thousands and thousands of other good and smart people. It was an analytical error that caused the second worst economic crisis in U.S. history (one that is very much in its early days and likely to become far, far worse in the event that stocks perform in the future anything at all as they always have in the past).

Certainly we want to hear the Trinity authors themselves explain what was going through their minds when they set up the methodology of their study. I have suggested that Money magazine start a new feature where each month someone steps forward and writes an article titled “I Was Wrong” in which he explains what was going through his mind during the Buy-and-Hold days. Bogle should do it the first month. Then we would move on to people like the Trinity authors. I would like to see Shiller do one. Shiller is not perfect. He has made mistakes. I am happy to do one if there are people who want that. I did not understand this all on the first day. I have had to move forward one step at a time just like all the other humans. I think it would be a good thing if you did one, Wade. I think you would acknowledge that you do not today know it all. You would help people if you wrote an article working through the process by which you went from holding a Buy-and-Hold mindset to holding a Valuation-Informed Indexing mindset (or whatever you want to call the new mindset — the terminology is of course not what is important here, the important thing is the attitude).

We all need to become more HUMBLE re the extent of our understanding of how stock investing works.

That is our single most important finding of the past nine years.

The Trinity authors need to become humble enough to be able to say the words “I” and “Was” and “Wrong.” If they are able to do that, there is no limit to the good they can do by doing so. If they are not able to do that, we need to say prayers for them and move on without them. There are many millions of people who have been hurt in very serious ways by the same analytical error that caused the Trinity authors to get the numbers so wildly wrong in their retirement study. Those people matter too.

To the extent that your point is that we should be charitable to the Trinity authors, I am of course with you 100 percent. It was not their intent to make any errors. As you pointed out, their intent was to improve our understanding of retirement planning. And, when you look at this in sweeping historical terms, they did indeed do that. We should of course be grateful for the work they did. But we cannot ignore the harm that was done to millions of aspiring retirees by the mistakes they made. Ignoring that is going to down the road cause a political explosion that may well tear our society apart.

I read an article just this morning about the Donald Trump phenomenon. The guy was saying that Trump is popular because middle-class people are becoming angry about what has happened to them and about the failure of their political leaders to handle matters more effectively. What do you think is going to happen when large numbers of them come to learn that we have had research for 30 years now showing that Buy-and-Hold is the most dangerous Get Rich Quick scheme ever concocted by the mind of mortal man and yet The Stock-Selling Industry continued spending hundreds of millions of dollars promoting it day and night in every possible venue? You don’t see a problem here bigger than the hurt pride of the Trinity authors?

You get it exactly right when you say that the goal should be teaching people what works. That is indeed what I need to be doing and what you need to be doing and what every person involved in this field needs to be doing. How do you propose we go about it?

You have been participating in an SWR thread that has been going around in circles for hundreds of posts. I have participated over the course of nine years in HUNDREDS of such threads. Why do they always go around in circles, Wade?

It’s because the Buy-and-Holders are in great emotional pain. They believed. And they are hurt to find out that they were wrong to believe.

That’s a reality of all this. The intense human pain that the promotion of Buy-and-Hold brought on is every bit as real as the numbers in the historical data. Anyone who is unwilling to deal with that pain lacks the ability to do good work in this field. I say that not as any sort of dig at you or anyone else. I say it because I know it is so. I have learned this through my interactions with tens of thousands of Buy-and-Holders over the past nine years.

I can go this morning to any web site on the internet (except for the ones where I am banned) and report the realities of stock investing. That’s nice. But I can tell you in advance the questions I am going to be asked when I report those realities.

The #1 question I am going to be asked is: “But, Rob, timing doesn’t work, does it?” To say that timing doesn’t work is to say that looking at the price of the stocks you are buying doesn’t work. It’s pure 100 percent foolishness. Yet some of the smartest people in the world believe this. I mean no offense, but I think it would be fair to say that there are certain ways in which you kinda, sorta still believe it. Heaven help us all, but I believe that there may be certain ways in which I kinda, sorta still believe it.

We’re not going to be able to move on until we deal with that question. People believe that timing doesn’t work because they have heard this claim 10 millions times and they have never heard it corrected. Their emotions are telling them that anything said that many times by that many smart people MUST be true. We need to explain how it came to be that they heard this complete nonsense claim millions of times and yet never heard it corrected.

There are a number of elements to the explanation but the biggest factor is cognitive dissonance. The Trinity authors didn’t sit down at their desks one day and say: “You know what might be fun, what if we got the numbers wildly wrong in a retirement study and caused millions of failed retirements?” They believed in Buy-and-Hold. They believed in the Efficient Market Theory. They believed in Modern Portfolio Theory. That’s why the numbers are wrong in the study. That’s why we are living through a global economic crisis today.

The next stop is another 65 percent drop in stock prices. That’s almost certainly going to put us in the Second Great Depression. Large numbers of people are going to become very angry. Some of those people are going to get caught up in their negative emotion and not be even a tiny bit as charitable as I am being in trying to come to a reasoned and fair explanation of why the Trinity authors (and many, many others) got so many things so wildly wrong for so many years. My take is that it is 10 millions times better to bring this to a head today and to handle it in a loving way before things get so bad that others handle it in a non-loving way and cause political frictions the likes of which we haven’t seen since the Civil War.

Of course, I only get one vote, Wade. That’s my vote. I will always reach out the hand of kindness to all Buy-and-Holders. I will always express my gratitude for the wonderful work they have done helping us get to this place where we are today able to invest in ways so much more effective than anyone has ever been able to invest before. If my voice is not strong enough to persuade other good and smart people to join the effort to bring this to a good place, then that’s what the Fates decided re this matter and I just need to accept it.

I’ll keep trying. And I know you will too. I personally believe that we will all get to the other side in one piece. I don’t say that I am 100 percent confident re that one. But that’s my (willfully?) optimistic take. I know that I want to have my name written down as one of those who was on the side saying that it was well worth saying the words “I” and “Was” and “Wrong” to bring on such wonderful breakthroughs and to avoid the human suffering that I believe will follow from continuing to duck these questions.

I sincerely thank you for sharing your thoughts and for thereby prompting me to organize mine a bit for their presentation here. Keep fighting the good fight however you see best to fight it, my good friend!

Rob

“I Think No One Really Knows the Precise Scope That the Trinity Authors Had in Mind….You Don’t Need to Convince the Trinity Authors to Fix Any Errors”

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Yesterday’s blog entry set forth the text of a comment I made in a recent discussion about safe withdrawal rates with researcher Wade Pfau (Wade says that he does not believe that the authors of the Trinity study meant to identify the safe withdrawal rate (SWR) in their safe withdrawal rate study and that the thousands of financial planners who for many years now have been saying that they did were mistaken to think that and that it’s just tough cookies for the millions of middle-class people who will likely be suffering failed retirements because of the errors made in the Old School SWR studies but not corrected to this day). Set forth below is the text of Wade’s comment in response to mine:

Rob, DRiP Guy kind of won me over with his discussion of scope vs. error at Bogleheads. Well, I think no one really knows the precise scope that the Trinity authors had in mind when they first formulated their study. But if their scope was only to look at how things worked out in the historical data, then there is no error. I mean, I’ve replicated their study and didn’t find errors in their calculations. So there is no error in that regard.

The error comes if people apply those success rates incorrectly to future retirements. I don’t know how the Trinity authors feel about the points you make regarding valuations. Perhaps they agree with DRiP Guy that valuations do not make an important difference, or at least that they do not provide a clear difference that can be correctly acted upon. But I still think there are other reasons to be worried about 4% (fees, international perspective, …) besides just the valuations issue.

This is where I wish the Trinity authors would be more vocal. But even so, the 4% rule is so ingrained into the national consciousness that even if they said something now it would have very little effect.

The duty is for others to come along and explain why they believe that the Trinity study does not provide the whole story about retirement planning in a forward looking manner.

That’s what you are doing. But in doing that, you don’t need to convince the Trinity authors to fix any errors. Just build on their earlier work. Which you did with your retirement evaluator.

As well, as the discussion at Bogleheads is now heading: the whole SWR debate is built on a rather artificial premise that people use a portfolio of risky assets to finance a clearly defined set of planned expenditures. In real life this isn’t how things work,

“Thousands of Experts Who Heard People Calling the Number Generated By the Study the “Safe Withdrawal Rate” Never Corrected the Record — Why?”

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Yesterday’s bog entry set forth the text of a comment by researcher Wade Pfau in which he advanced the idea that “perhaps the Trinity study was not meant to be a safe withdrawal rate study.” Set forth below is the comment that I posted in response:

The study uses a word very similar to “safe,” Wade. I believe the word it uses is “sustainable.” People just shortened that to “safe.” The two words mean essentially the same thing. A 4 percent withdrawal rate is no more sustainable than it is safe for retirements that begin at times of high valuations.

There are millions of people who are likely going to suffer failed retirements because of the demonstrably false claims put forward in the Trinity study, Wade. We have also seen numerous discussion boards burned to the ground because the authors of discredited studies and calculators based on the Trinity study did not want people to find out about the errors they made in them. The Trinity study and all the studies and calculators based on it should have been corrected when the errors in them were first made public (May 2002).

You are suggesting that the thousands of experts in this field who heard people calling the number generated by the study the “safe withdrawal rate” never corrected the record — Why? This doesn’t add up. If this was just a question of people using the wrong word, someone would have spoken up many years ago.

The reason that the authors of the study got the numbers so wildly wrong is that the authors of the study believe in the Efficient Market Theory. Under the Efficient Market Theory, stocks are always priced rationally and properly. Thus, both overvaluation and undervaluation are meaningless concepts.

We know that this is the reason for the errors because this same error (a failure to account for the effect of valuations in an investing analysis) was made in the examination of many other questions. For example, you see this error made in 90 percent of the analyses you see relating to what stock allocation is best (see, for example, the entire book Stocks for the Long Run).

Are we going to say that there was some mistaken terminology used throughout the entire book Stocks for the Long Run? No. Siegel was influenced by the Efficient Market Theory into thinking that there is no need to consider valuations when setting one’s stock allocation, just as the authors of the Trinity study were influenced by the Efficient Market Theory into thinking that there is no need to consider valuations when planning one’s retirement.

The error at the core of the Efficient Market Theory is fundamental. It has influenced every aspect of investment analysis for decades now. It needs to be corrected, not rationalized.

I agree with you 100 percent that the intent of the authors of the Trinity study was to point out that 7 percent withdrawal rates are not safe. The same is true of the authors of the follow-up studies and calculators. When you talk about intent, you move from the objective realm (the study gets the numbers wrong) to the subjective realm (the authors were trying to do a good thing). There’s no doubt in my mind that the vast majority of the people promoting the Efficient Market Theory (perhaps every last one of them) have good intent. It’s possible for someone to have good intent and still get something wrong. That’s what has happened here.

The real trouble has been the difficulty that people have experienced acknowledging the error. It is only by acknowledging that we don’t know everything that we are ever able to learn anything new. So discovering errors we have made opens up wonderful growth opportunities. The question we should all be reflecting on is: Why is it that in the investing field it is so darn hard for people to acknowledge obvious analytical errors (Shiller published research in 1981 showing that valuations affect long-term returns)?

I believe that, ironically, the reason is because investing is so darn important. If the errors didn’t matter, the people who made them would be happy to correct them. The errors we are talking about here are HUGE in their effect. It is the widespread promotion of Buy-and-Hold investing strategies that was the primary cause of the economic crisis. As you point out, the people who published these studies did so with good intent. Now they are being asked to acknowledge that errors they made played a big role in causing the second biggest economic crisis in U.S. history. That’s a lot to swallow.

To understand how humans react when they are faced with having to swallow that much, you need to go outside the literature published in the investing area or even the economics area and read the literature published in the field of human psychology on the phenomena of cognitive dissonance. Widespread cognitive dissonance is the only possible explanation of the behavior we have seen from so many otherwise good and smart people over the course of the past nine years.

Should we be charitable to people suffering cognitive dissonance? Of course. Obviously. They are fellow humans in pain. Our job is not to make them feel bad but to take them to a place where they can begin for the first time in a long time to feel a whole big bunch better.

Is it an act of charity for us to engage in word games that permit us to pretend a little while longer that the studies are not in error? It is not. That is an act of cruelty.

The next step is another price drop of 65 percent. A price drop of that size on top of what we have already seen is likely to put us in the Second Great Depression. How are the authors of the Trinity study (and all those who have put forward convoluted rationalizations on their behalf over the course of the past nine years) going to feel about themselves after they are forced to add to their record that they caused the Second Great Depression because they were not able to work up the courage to say the words “I” and “Was” and “Wrong” about a numerical error they made in a retirement study? Putting off recognition of the error just makes things far, far, far worse than they already are.

There IS a life-affirming way to proceed. The ultimate reality here is that we now have available to us the most effective investing strategy the world has ever had available to it (Valuation-Informed Indexing). If we could publicize VII, we could restore the confidence of middle-class workers that their retirement plans are going to work out. If we did this, we would be within six months looking at this economic crisis in the rear-view mirror. I think it would be fair to say that, once we did that, there wouldn’t be too many focused on any of the boo-boos made at earlier times.

And there’s more. When people wrote the history of how we got to the wonderful place that we can all go to for the price of acknowledging that humans are still capable of making mistakes, they would need to acknowledge that the authors of the Trinity study (and all the follow-up studies and calculators) played an important role in getting us there. Humans don’t learn all there is to know about a subject in one attempt. As you point out, the Trinity authors taught us something important — that 7 percent is not safe. People who came later built on that work and taught us even more — that even 4 percent is not safe at times of insanely high valuations and that even 9 percent is safe at times of insanely low valuations. No, the Trinity authors did not say that in their study. But they played a key role in the story and fair-minded people are going to acknowledge that.

But they can’t very well acknowledge it today, can they?

They can’t acknowledge it today because it isn’t so today. It isn’t so because we cannot move forward to learning what we need to do to enjoy far higher returns with far less risk UNTIL WE GET ABOUT THE BUSINESS OF BUILDING A NATIONAL CONSENSUS THAT VALUATIONS AFFECT LONG-TERM RETURNS, THAT THE EFFICIENT MARKET THEORY IS THUS INVALID AND THAT BUY-AND-HOLD IS THUS (HOWEVER MUCH THIS MAY BE CONTRARY TO THE INTENT OF THE PEOPLE WHO CAME UP WITH IT) THE PUREST AND MOST DANGEROUS GET RICH QUICK SCHEME EVER DEVELOPED BY THE MIND OF MORTAL MAN.

That’s the price of admission, Wade. I don’t say that because I am a meanie. I say it because I am an anti-meanie. There is no other way to take this to a good place. I have spent every day of the past nine years trying to think up some other way, some way that lets people not have to say The Three Magic Words, and there simply is no other way. If we can reach a consensus that The Three Magic Words really must be spoken, we thereby enter a very magical place for all of us — high investment returns at minimal risk, huge economic growth, an end to the economic and political crisis, thousands of new studies and calculators and blogs and books and discussion boards that describe strategies that actually work in the real world. If we cannot work up the courage to do that, we in all likelihood bring on the Second Great Depression and only the devil himself knows what horrors follow from that.

I say that the Trinity authors got all the numbers wildly wrong. Not by intent. They were in the company of a whole big bunch of good and smart people in thinking that the Efficient Market Theory was valid. But it is not. There is now a mountain of evidence showing that valuations affect long-term returns and precisely zero rational grounds for believing otherwise. I believe (strongly) that we all need to move on.

Scott Burns once told me that he viewed my effort to let middle-class investors know what the historical data really says about safe withdrawal rates as “catastrophically unproductive.” I don’t agree with Scott re this one. I see the efforts of all those (including Scott) who have helped with the cover-up as “catastrophically unproductive.” I love learning. That’s why I became a journalist. I love asking questions, learning the answers to them and sharing what I have learned with others. It fills my heart with joy that we have learned so many wonderful things about how stock investing really works during the first nine years of our SWR discussions. My strong hunch is that we will all be working together to learn a whole big bunch more in days to come. I very much look forward to the experience.

I have a funny feeling you are going to be right in the middle of all the good, exciting stuff that will soon be going down, Wade. We are getting close to the time when the real fireworks (the good kind!) begin! Let’s all let that in and put this ugly rationalization junk behind us once and for all.

Rob

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

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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.