I put a post to a Motley Fool discussion board at 9 A.M. on the morning of May 13, 2002. It argued that, given Robert Shiller’s Nobel-prize-winning research (he hadn’t yet been awarded a Nobel prize at the time) showing that valuations affect long-term returns, it is a logical impossibility that the safe withdrawal rate is always the same number (there was a fellow at that board who claimed that it is always 4 percent).
Lots of people liked the post. They thanked me for launching the most helpful debate in the history of the forum.
A greater number didn’t like it one tiny bit. I was eventually banned from the forum for pointing out that error and I have been banned from many other investment sites in the years since. I was right. Enough high-quality people have told me that I was right that I believe that to be the case. But the majority of investors don’t want to hear what’s right today. The majority wants to hear what the Buy-and-Holders say, that stocks are always an equally appealing investment class, that there is no need to look at valuation levels to determine the true safe withdrawal rate or the true value of a stock investment at a given point in time.
It’s a discouraging reality. A highly discouraging reality. We all would live better lives if we gave ourselves permission to talk openly about the far-reaching implications of Shiller’s amazing research. If we all knew to lower our stock allocation a bit when prices began to get dangerously high, they never could get too dangerously high. We could rein in irrational exuberance before it got so out of control as to cause a price crash and an economic collapse and an increase in political frictions. Learning new things about stock investing can help us to live better and fuller and richer and freer lives. But of course none of the magic happens until we integrate the research findings into our understanding of how to invest in stocks. So the Shiller Revolution has thus far been a Revolution Denied.
All that said, I very much believe that we are on the right track.
The arc of history bends toward rationality
Martin Luther King once argued that the ark of history bends toward justice. It’s not hard to imagine that there were times when he had to reassure himself that that was so just to continue on with the battles he was fighting. I believe that in the personal finance realm the way to think about it is that the arc of history bends toward rationality.
It is not rational to calculate the safe withdrawal rate inaccurately. The discussion board at which I got into so much trouble was focused on the topic of early retirement. There were people there who retired in their early 60s or in their 50s or in some extreme cases (believe it or not) even in their 40s. My recollection is that the fellow who claimed that the safe withdrawal rate is always 4 percent handed in his resignation from his corporate job (he was a chemical engineer) at 41. He needed to know before taking that step that he had accumulated enough assets to never want to take it back. You can’t go back to your employer five years later and say: “Oops! I did it again! Can I have my six-figure salary back?”
The 4 percent figure is not the safe withdrawal rate. It could properly be referred to as the Historical Surviving Withdrawal Rate. The worst date to retire in U.S. history was the day before the onset of the 1929 crash. A retirement that began on that day and that called for a 4 percent withdrawal would have $1 remaining in it at the end of 30 years (taking someone who retired at age 65 to age 95). That’s why those who tout the “four percent rule” maintain that that withdrawal rate is “safe.”
What they miss is that the sequence of returns that we saw from 1929 through 1959 was a bit on the lucky side. In half of the return sequences that we have seen in the history of the U.S. market, that 4-percent-withdrawal retirement would have failed. A retirement with only a 50 percent chance of working out is not safe in anyone’s reasonable use of that word. It is extremely risky. Those retirements did indeed survive but not because they were safe.
Learning how stock investing works
There are things that we do not know about stock investing today. Things that we still need to learn. That’s the big picture. That’s the reality.
Guess what? We’re in the process of learning them. It’s a total bummer that we have not moved farther along the learning curve given that Shiller’s research has been available to us for 43 years now. But it’s a total thrill that we are moving in the right direction. Slow and steady, to be sure. But there’s a lot of human history showing that slow and steady really does win the race.
There was a fellow who posted under the name “EarnaBuck” who advanced a post that has always stuck with me. This was a few years after I had been kicked off the Motley Fool site. EarnaBuck was not a fan of Valuation-Informed Indexing. He said that he could not endorse my views on stock investing. But he urged the community at which I was then posting (this was the “Vanguard Diehards” board at the Morningstar.com site, another site from which I was in time disinvited to participate further) to let me make my case. EarnaBuck said that he had been there in the early days of the Motley Fool discussions and that he thought that I was nuts but that in time he had come to see that I was right, valuations really do need to be considered in the calculation of the safe withdrawal rate.
Learning is possible!
Even in the investing advice field!
I love learning! My Buy-and-Hold friends say all the time that there is no such thing as a free lunch and I rarely can resist pointing out that learning is a free lunch. One day you don’t know something and your life is a mix of sorrows and joys and the next day something clicks and all of a sudden the ratio of joys to sorrows is a bit higher. Without your having had to pay a dime for the change! That’s a mighty good deal indeed!
The safe withdrawal rate is a number that changes depending on the valuation level that applies on the day the retirement begins. I still say it. I am still right. When the day comes when I am able to say it freely any place I choose, the arc of history will have bent a little more in the direction of rationality in our understanding of how stock investing works.
Rob’s bio is here.
