My Days at Pizza Hut University

Research on Safe Withdrawal Rates

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hocus
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My Days at Pizza Hut University

Post by hocus »

The August 27 issue of the Wall Street Journal has an article about reaction to the Peter Bernstein speech from early this year in which he voiced support for the much-criticized strategy of "market timing."

Here's a link to the article. You need to subscribe to view the link.

http://online.wsj.com/article/0,,SB1061 ... 00,00.html

Here's an excerpt:

"Since the speech, his remarks have been circulated widely, touching off a debate among pension-fund managers and other institutional investors over how strictly portfolios should adhere to buy-and-hold policies. Small investors should take note as well, since investment advice for individuals often has its roots in the world of institutional investing.

Mr. Bernstein says... he is "flabbergasted" at the amount of feedback he has received. "I've given a zillion speeches and never had a response such as with this one."

end of excerpt

It was an interview that resulted from the Bernstein speech that was the source of my question to Ed Easterling re Bernstein's views.

Here is my question to Easterling. It's about two-thirds of the way down the link, the one that comes in at 6:55 am.

http://nofeeboards.com/boards/viewtopic ... 9643#p9643

Here is Easterling's response. It's the second post at this link.

http://nofeeboards.com/boards/viewtopic ... 9649#p9649

Here is the full text of the interview with Bernstein. It's the first article in the 2-28-03 issue.

http://www.weedenco.com/welling/biframe.htm

Here is a link to a thread at the Motley Fool's REHP board re the Wall Street Journal article (started by intercst, to his credit).

http://boards.fool.com/Message.asp?mid= ... e#19514455

The Wall Street Journal article follows on the heels of the publicity we have seen lately for the "Worry-Free Investing" book and the "Yes, You Can Time the Market!" book. Ben Stein, author of the latter, is quoted in the WSJ piece. I think what we are seeing here is the early stages of development of a trend in personal finance journalism. I would not be surprised if, a year from now, there are all sorts of articles about how investors need to change their asset allocations to take advantage of changes in valuation levels. This is how trends in reporting get started. An influential figure like Bernstein gives a speech, the idea takes hold among other professionals, it slowly spreads to a paper like the Wall Street Journal, and then all sorts of journalists who don't believe something is "true" until the Wall Street Journal has reported on it get in on the act.

I also would not be surprised if at some point we saw lawsuits being brought against the many investment advisors who in the late 1990s argued for allocation strategies that took no account of the effect of changes in valuation levels. The defense will be that "everyone" thought at the time that changes in valuation levels didn't matter, that it was just assumed that an allocation strategy that made sense in 1979 also made sense in 1999.

An angle of this that we have not been able to explore in any great depth yet is the question of how so many bright people were taken in by the "stocks for the long run" mantra, even after valuations rose to a level where the data that once lent some support to the mantra no longer did so. I remember how often that concept was drilled into my head in the days before I began looking into the SWR question in late 1995. But I also remember how little I had to go on when I began my independent efforts at determining what asset allocation met my need for a long-term 4 percent withdrawal. I had a pad of paper that I used to bring with me to Pizza Hut on Saturday mornings and I had a calculator that Money magazine sent me for free when I took out a magazine subscription.

When I don't bow down to the authors of the Trinity study and the Harvard guy who did the early conventional SWR study and all the rest of the so-called "experts", the reason is that I just am flabbergasted that these people received such fine eduations and were not able to figure out something that I figured out during my days at the School of Thin Crust Supreme. I'm no I.Q. point powerhouse, and I'm no Numbers guy. But I was able to figure out by spending a little time with the historical data that there was no possible way to determine what withdrawal was safe for the long term without taking into account changes in valuation levels.

Why weren't the Harvard guys (I'm not referring to Peter Bernstein with this comment) able to do the same? Why is it that they are only beginning to even talk about this stuff now, after middle-class investment accounts are down to the tune of hundreds of millions of dollars of accumulated capital?

I don't know. But I hope that as time goes on we may be able to pick up a few clues. In any event, I suspect we will be hearing more from Peter Bernstein and some others on this subject in days to come.
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Post by wanderer »

Why weren't the Harvard guys (I'm not referring to Peter Bernstein with this comment) able to do the same? Why is it that they are only beginning to even talk about this stuff now, after middle-class investment accounts are down to the tune of hundreds of millions of dollars of accumulated capital?

these are the questions i find intriguing. the last 10-13 years have been a clinic in investor psychology. i just was chatting with someone offline who asked why i didn't go for the 4% from reputable sources stuff in 2000, that hocus references above. i had a lot of answers, logical stuff, but i ended with the fact that 'i'm not a joiner' and that i was pessimistic and that the frequent refrain of "can i take out 4% from my alltime high value since it doesn't really matter where i start, right?" and the 15%-20% p.a. 'birthright' were earmarks of "regression". i noted that all my overarching reasons appeared to be personality/psychological explanations for my behavior. smell test, hunches approach. i guess, at some level, there was probably some experiential reason for many of my investing behaviors (auditing makes you pessimistic - you exist because people steal, you see people at their greediest). anyhoo, just some thoughts.

I give you 4 frying pans, er, deep dishes for bringing that up, paul.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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Post by JWR1945 »

Here is the full text of the interview with Bernstein. It's the first article in the 2-28-03 issue.
http://www.weedenco.com/welling/biframe.htm
That is a fascinating interview. It is well worth reading.

I was hoping to claim that Peter Bernstein has been getting his ideas from the nofeeboards, but the date is too early.

Previously, I have been able to claim (successfully enough) that Warren Buffett is projecting future stock returns based on early threads on our FIRE board.

Have fun.

John R.
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Post by wanderer »

That is a fascinating interview. It is well worth reading.

indeed. i googled that quote after hocus failed to provide a link. great stuff. thank you for bringing that to our attention, hocus.

the weedon site has many other interviews with insightful folks - few put things as well as the two bernsteins, imo.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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Post by Mike »

If I understood the article:

1) Dividends were the lion's share of past equity total returns.

2) Dividends are at historically unprecedented lows.

3) Therefore, future equity returns from here are likely to be below historic averages.

To me, it seems that the boomers may be causing this lower dividend yield with their 401k and IRA retirement savings. If this is the case, the yield may stay low until the boomers start to retire in force. It may even go lower before it is all over. Of course, the market rarely pays any attention to my guesses. :)

Mike
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Post by JWR1945 »

mike wrote: To me, it seems that the boomers may be causing this lower dividend yield with their 401k and IRA retirement savings. If this is the case, the yield may stay low until the boomers start to retire in force.
The immediate effect of tax sheltered accounts (401k's and IRA's) is to favor dividends. You are able to avoid the immediate taxation of dividends. They are penalized in taxable accounts.
Therefore, future equity returns from here are likely to be below historic averages.
NOTE: This was stated in relation to dividends, not P/E multiples.

I disagree strongly with Peter Bernstein on this point. It might be so. But we don't know. We don't have enough data spread over enough years.

It is not necessarily true that a company's reinvestment of dividends in itself via reduced payouts is less efficient than reinvestment by investors. Certainly, it leaves investors with less control. It does not necessarily leave them with inferior returns.

My point is that we don't really know. At least, not yet.

The most important distinction is between buying and selling (i.e., spending). When buying, volatility is good. To the extent that you use dollar cost averaging, you get a 5% to 10% bonus, which increases as volatility increases. In a sense, 401k and IRA investors should favor the increased volatility of low dividend stocks. (Yes, that is in spite of the effect of taxes that I mentioned earlier).

In contrast, when selling, volatility is bad. It is a killer. To the extent that you do the equivalent of dollar cost averaging while making withdrawals, volatility costs you that same 5% to 10%. Dividends shelter you from this effect.

Another distinction between buying and selling (or accumulation and distribution) is the preferred sequence of returns. With buying, you want any P/E multiple expansion to come later and you want any contraction to come at first. When selling, you want P/E multiples to expand right away and to delay any contraction as long as possible.

The use of bold letters was appropriate when Peter Bernstein talked about spenders. That is the key distinction.

Have fun.

John R.
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Boomers and Dividends

Post by Mike »

John R. wrote:The immediate effect of tax sheltered accounts (401k's and IRA's) is to favor dividends.
Mike replies:

Exactly so. By encouraging boomers to buy dividend paying stocks, the 401k/IRA has raised the price of the stocks, thus lowering yields. Similar to how the tax favored status of municipal bonds lowers their yield compared to taxable bonds. For most of history, dividend yielding stocks have been owned primarily by the very rich. The 401k has encouraged less wealthy people to buy stocks in larger numbers, and the sheer size of the boomer cohort has magnified the effect. The increased demand for dividend paying stocks is part of the reason that I think dividend yields have fallen. Of course, I am still learning about this subject, so I may have missed something.

Mike
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Post by JWR1945 »

mike wrote:For most of history, dividend yielding stocks have been owned primarily by the very rich. The 401k has encouraged less wealthy people to buy stocks in larger numbers, and the sheer size of the boomer cohort has magnified the effect. The increased demand for dividend paying stocks is part of the reason that I think dividend yields have fallen.
This is quite interesting. I suspect that Mike is right, but not to the extent that he imagines.

Prior to defined contribution plans and their 401k's, retirement plans were managed institutions. Historically, those institutions favored stocks more than individuals. That would produce an effect opposite of what Mike has suggested. However, even that can change over time and it may be that the individual now has the greater preference for stocks.

When it come to the sheer size of the boomer generation, there is no doubt that Mike is correct. If I am not mistaken, the likelihood that an investor will select stocks of any kind increases with wealth and income. Not only the size of the boomer generation comes into play, but also their prosperity.

The tendency to favor stocks that pay dividends is more often associated with those who actually are retired than with the population at large. However, dividend paying stocks are becoming fashionable. They are even becoming a fad. That fad should last a while for two reasons: the tax cut on dividends and the prospect of dramatically increasing numbers of retirees.

401k's are probably neutral as to the size of retirement accounts overall. IRAs probably increase the total. Yet, the boomers are moving toward retirement and many are investing heavily (and/or investing for the first time!).

As for why people are demanding more dividends now than during the bubble, let me point to the continual dot.com propaganda of that time. There were words about taxes and so forth. But I think that the biggest single reason for emphasizing the growth in stock prices was that there weren't enough earnings. It was all future earnings and, perhaps, future dividends.

Have fun.

John R.

P.S. This is getting really interesting.
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Post by Mike »

John R. wrote:Prior to defined contribution plans and their 401k's, retirement plans were managed institutions. Historically, those institutions favored stocks more than individuals. That would produce an effect opposite of what Mike has suggested.
Mike replies:

That would be true if all (or the vast majority) of defined benefit plans had converted over to 401k plans. However, despite the many companies who have converted over, a significant number of people are still covered by defined benefit plans. Indeed, some people have both defined benefit and 401k plans. As of the second quarter of 2000, there was 2.2 trillion in defined benefit plans, as compared to only 800 billion in 1985. 2.5 trillion is in 401k plans. State and local government plans are unaffected, and have another 2 trillion plus in them. Insurance companies hold another 300 billion. The 401k plan has mostly supplemented the money that defined benefit plans have in the market, not replaced it. Many people have 401k plans that never had a defined benefit plan in the first place, and the total increased demand for dividend paying stocks is what I think has forced up the prices.

Since defined benefit plans are back weighted, the aging of the baby boom will force companies that still have these plans to make increasing contributions to them. When a plan fails, the PBGC places the entire failed plan assets into the stock market, instead of usual stock/bond mix. These factors will continue to partially offset the gradual demise of defined benefit plans. 401k/IRA eligibility went from zero to a majority of the working population, which drastically increased the average person's exposure to equities. This trend shows no sign of ending in the near future, which makes me think stock prices will remain high (and dividends low) until the boomers (and the defined benefit plans that pay a pension to some of them) decide to cash in their chips. Notice how retirement plans of all types have steadily increased the percentage of the total stock market that they own.

http://www.ebri.org/facts/0101fact.htm

http://www.ebri.org/facts/0800fact2.htm

Mike
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Post by hocus »

Mike: As of the second quarter of 2000, there was 2.2 trillion in defined benefit plans, as compared to only 800 billion in 1985. 2.5 trillion is in 401k plans.

I have a fondness for contrarian claims supported by citations to data. Thanks for joining us, Mike.

Peter Bernstein: Why has market timing been considered a dirty word? It's only been because if the stock market always bailed you out over the long run, you couldn't run the risk of missing out on those long run goodies....What I am arguing is that if today's extremely unusual valuation issues - the low risk premium - makes getting those long-term goodies an extremely low probability bet over, say, the next 10 years, then the risk of being out of the market "because it might go up" is much lower. Any upswing that you might miss is far more likely to be a short-term one, than a long-term structural opportunity.

Here is a link to a study from the Financial Analysts Journal dated March/April 2002, Volume 58 No.2, by Robert D. Arnott and Peter L. Bernstein. It is about "What Risk Premium Is Normal? " The link to the full article is:
http://www.aimrpubs.org/faj/issues/v58n ... 0064a.html
The link to download the article as a PDF file:
http://www.aimrpubs.org/faj/issues/v58n ... 80064a.pdf

JWR1945: It is not necessarily true that a company's reinvestment of dividends in itself via reduced payouts is less efficient than reinvestment by investors. Certainly, it leaves investors with less control. It does not necessarily leave them with inferior returns.

Here's a link to a thread from the FIRE board in which JWR1945 discussed the point raised above in connection with a claim made in the Arnott/Bernstein paper cited above.

http://nofeeboards.com/boards/viewtopic ... ght=#p7410
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Post by wanderer »

JWR1945 wrote:It is not necessarily true that a company's reinvestment of dividends in itself via reduced payouts is less efficient than reinvestment by investors. Certainly, it leaves investors with less control. It does not necessarily leave them with inferior returns.
Well, it certainly would have been less efficient than reinvestment by this investor.
regards,

wanderer

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Post by JWR1945 »

wanderer wrote:Well, it certainly would have been less efficient than reinvestment by this investor.
If that is so, why did you invest in that company? If you have selected a winner, shouldn't it be among your favorite investment choices, at least for a few years?

I can understand a desire to reap some of your gains from time to time. That is called re-balancing. Perhaps, you wish to increase the diversity of your portfolio. I can understand that as well. But if you think that a company is going to do poorly, why do you invest in it?

Have fun.

John R.
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Post by hocus »

JWR1945 [from the FIRE board thread cited above]: The main observation for our purposes is that the earnings and dividends were lumped together. A correlation was noted and a speculative guess as to its cause was suggested but not proved. When we see real E10 jump during the 1990s (as shown in the January 2003 numbers), we should not dismiss this fact out of hand.

Here is a link to a PDF version of a paper that might shed some light on some of the dividend-related questions. It is called "The Importance of Dividends," and was prepared by Lawrence Booth. Click on "Reaearch" at the bottom of the screen, and then scroll down through "Recent Publications" until you get to the paper on "The Importance of Dividends."

http://www.rotman.utoronto.ca/~booth/

Excerpt:

"Recently Arnott and Bernstein and others have drawn controversial conclusions on the size of the equity risk premium in part from the study of aggregate dividends and earnings. Consequently, it is important to check on how robust their conclusions are."
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Post by JWR1945 »

Mike has made a compelling argument to explain a general decrease of dividend yields as a result of increasing stock prices, which are themselves largely a result of retirement accounts. He has provided a good argument as to why such effects should affect dividend paying stocks even more than others.

I will now draw attention to the reduction in stock payout ratios. Refer to this thread that I started. That thread was to improve estimates of stock growth rates. Those estimates would then become the inputs to a Monte Carlo model.

JWR1945 thread about stock market return projections dated Tuesday, Feb 11, 2003 at 10:27 pm CST on the FIRE board.
http://nofeeboards.com/boards/viewtopic.php?t=494

I draw attention to the beginning of section B on the first post in that thread:
B. Details
My original observation was based on an eyeball evaluation of graphs of the real earnings amount and the real dividend amounts from Professor Shiller's data. There seems to be a divergence around mid-1948. I looked at historical point values (single year amounts) for the ratio of real dividends to real earnings or payout ratio, the ratio of the real dividend amount to the price (S&P 500 index value) or dividend yield and the inverse of P/E10. I looked at numbers for January of the years 1881, 1901, 1921, 1941, 1961, 1981 and 2001. I chose to start with 1881 since it had the first entry for PE10.

The payout ratios were stable. They were 54.5%, 62.6%, 66.8%, 63.9%, 60.6%, 42.1% and 33.4%. Roughly speaking, today's payout ratio is one half of the older values.
hocus has provided an interesting link to The Importance of Dividends by Lawrence Booth. When reading that study, keep in mind that it refers year-by-year earnings and dividends. In the data that I used (taken from Yale Professor Shiller's database), all of my earnings numbers were averaged over the previous ten years. I also restricted my investigation to real dollar amounts (i.e., after adjusting for inflation).

Until just recently, there have been two causes for reduced dividend yields: the higher prices that Mike has talked about and the lower payout ratios.

Have fun.

John R.
Last edited by JWR1945 on Thu Sep 04, 2003 2:04 pm, edited 1 time in total.
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Post by hocus »

Bernstein Interviewer [from the link to the Bernstein interview above]: You created quite a buzz among foundation and endowment types with that speech you delivered to a gathering in Phoenix at the end of January.

The PDF link set forth at the link below is described as "a slightly revised version of a presentation given to the 2003 AIMR annual conference in Phoenix, Arizona." The fact that the material linked below comes from a speech delivered in Phonix leads me to believe that it may be from Bernstein's controversial speech from last January, which until now we have only seen summarized in the interview with Bernstein and in the Wall Street Journal article.

http://www.aimrpubs.org/faj/issues/v59n ... 0018a.html

Excerpts:

"I have no doubt that a point of inflection has been passed."

"These features of investment management became so entrenched in the investment process that they lost their dynamic impact. More seriously, they began to undergo qualitative changes that blunted their value--and may even have destroyed it."

"It would be difficult to characterize the S&P 500 as a diversified portfolio....The 10 largest companies in the index--2 percent of the total number--accounted for 25 percent of the market value and the top 25 companies accounted for 40 percent. That is diversification? As past experience demonstrates, it is a formula for heightened volatility."

"Indexing is not likely to regain its old popularity until expected returns once again exceed required returns."
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Post by wanderer »

JWR1945 wrote:I can understand a desire to reap some of your gains from time to time. That is called re-balancing.
Actually, we reap benefits every year. We call them 'interest' and 'rents'. We sacrifice some tax efficiency for downside protection.
Perhaps, you wish to increase the diversity of your portfolio. I can understand that as well.
This is correct. Bought lots of VEIEX and VPACX abck in 1997/98. Looked like a bad decision for a while. Not now. 10% p.a./1% p.a. advantage over the past 5 years vs. VFINX, respectively.
But if you think that a company is going to do poorly, why do you invest in it?
We (mostly) try not to (invest in indices of market segments/asset classes we believe will do poorly) mainly because, as has been pointed out to hocus repeatedly, we are unsure of the future (and we hate to sell). So we hedge our bets. We got out mostly, but keep a toe and an ankle in with 14% in LC US, 20% in VWEHX.

Where did we go instead - sold some LC equities and paid off mortgage to clean up balance sheet in 2000/01. Bought RE 00/01. Bought high yield debt 01/02. Bought some int'l early this year (Feb/Mar 03) We didn't think these beaten down babies would do poorly. They didn't disappoint (much).

Bernstein?! being quoted -

"Indexing is not likely to regain its old popularity until expected returns once again exceed required returns."

Indexing is still very popular in our household - just not VFINX. :great:
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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Post by JWR1945 »

I find these excerpts interesting and insightful. They are from the Peter Bernstein article that hocus has provided.
http://www.aimrpubs.org/faj/issues/v59n ... 0018a.html
Indexing. The practice of indexing has been the most glowing offspring of the efficient market hypothesis. Indexing means matching asset-class market returns on a risk-adjusted basis, a feat the efficient market hypothesis tells us is impossible and that a steady flow of research tells us is almost impossible. Almost all of the superior performance earned from indexing has derived from extremely low fees, extremely low turnover, and extremely broad diversification.
I can match two of those advantages very easily. In fact, I do.

Later on, Peter Bernstein said:
Although these comparisons are interesting, the objective of portfolio management is to fund liabilities, either current or future, either known with precision or estimated, either actual or expected. The true benchmark, then, is the return required by the structure and timing of these liabilities. This principle applies whether we are looking at a pension fund, an endowment fund, a foundation, or an individual hoping to grow wealthier.
So much for a single, one-size-fits-all solution.

Have fun.

John R.
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Post by Mike »

Hocus wrote:Thanks for joining us, Mike.
Mike replies:

Thank you for the welcome. I will ponder the links you cited.
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Post by hocus »

as has been pointed out to hocus repeatedly, we are unsure of the future

You have fallen victim to one of the tricks of the Disruptors, Wanderer.

Dating back to the May 13, 2002, post, my position has been that aspiring early retirees need to know the true SWR, the one revealed by looking at the historical data. The goal of SWR analysis is to determine the highest withdrawal rate that will work in a worst-case scenario presuming that the future is like the past. So I have never maintained in any way, shape, or form that those performing a valid SWR analysis need to possess knowledge of future events. What they need is a willingness to look at all of the historical data that bears on the question of what withdrawal rate is safe.

I don't doubt that you have read posts both at the Motley Fool's REHP board and at the NFB site's FIRE board suggesting that I have argued that there is a need to know future events to calculate the SWR properly. These posts were put up by frustrated defenders of the conventional SWR methodology. Defenders of that methodology have not been able in over 15 months to find any data to support thier views and, thus, have turned to semantics games as the only possible way of asserting their positions. Please do not take posts by posters defending the conventional methodology at face value. Many of those posts are uninformed. Some, including a good number put forward by intercst, are deliberately deceptive.

I have been concerned about the confusion that these posts have caused for some time. That is why I have devoted so much time to correcting them. The primary reason why I started this board was to provide a place for informed and reasoned discussion of the SWR issue, where community members seeking to engage in such discussions could do so free of the tactics that have been used to block effective debate at other boards.

I do not want to see comments like the one you made above appear at this board. They send the discussions off track and they waste the community's time. You have a responsibility to the community that meets here to hear honest and informed comments on SWRs to take some care re the accuracy of claims made or suggested in your posts. I have a responsibilty to police you and other posters to see that the discussions here do not degenerate in the way that they have degenerated at other boards participating in The Great Debate at earlier times.

If you have heard something about my views that does not sound right to you, it is fair to assume that you picked the idea up by reading uninformed posts (or even outright deceptive posts) put up at another board. If it doesn't sound like something that a person informed on the subject of SWRs would believe, I probably don't believe it. The best procedure is to read my posts to determine what I believe, and ignore the uninformed posts that say that I believe things different from what I say in my posts that I believe.

If there is an issue that troubles you enough that you want to be sure what I believe, please just put up a post at this board asking me what my position on the issue is. That is a far more efficient way of resolving these questions than you embedding the claims of uninformed posters in your own posts and therey giving those claims a credibility among other community members that they do not deserve.

This is not a petty issue. You are one of the smartest posters in the FIRE community, Wanderer. The fact that you fell for at least one of the claims that was first put forward by the REHP board Disruptors is disturbing indeed. There is evidence in other posts that you have fallen for others. Seeing that you were fooled by these claims makes it more clear to me than ever that many others have been fooled as well. Disruptive and deceptive posts cause long-term damage to discussion board communities.

It's time for the trickery and confusion to be put to an end. This board is for honest and informed posts on the realities of SWRs. Please include in your posts here only claims that you know by your own reading of the debate posts to be true.

I don't want to make anyone feel uncomfortable about posting here just because they are not an expert on the SWR issue. There is no problem with any poster putting up a question, even on the most basic of points. The problem comes when a respected poster like wanderer puts up a claim that was put forward at earlier times solely to spread confusion on the issues and thereby lends credibility to a claim long ago discredited in the eyes of those paying careful attention to the discussions.

Both JWR1945 and I have been following The Great Debate closely since its early days. So all community members should feel free to ask questions about the various semantics tricks that have been employed to get things off course. All posters trying to advance the community's understanding of the issues should feel free to make use of the background that JWR1945 and I possess on this issue to advance their understanding. The thing to do is to ask questions rather than to repeat false claims that you have been taken in by through reading posts put up by uninforned (or deceptive) posters in the past.

Fair enough?
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Post by hocus »

Peter Bernstein: Although these comparisons are interesting, the objective of portfolio management is to fund liabilities, either current or future, either known with precision or estimated, either actual or expected. The true benchmark, then, is the return required by the structure and timing of these liabilities. This principle applies whether we are looking at a pension fund, an endowment fund, a foundation, or an individual hoping to grow wealthier.

JWR1945: So much for a single, one-size-fits-all solution.

Thank you for drawing our attention to that particular Bernstein comment, JWR1945.

Here are some comments put forward in my "Coin Toss" post of June 20, 2002.

"I know that there have been some who have been perplexed when I have argued that there is not one safe withdrawal rate, but many, that the safe withdrawal rate varies according to the personal circumstances of the particular investor at issue. What I like about Mark's post is that he takes the concept that I have been trying to get across and conveys it in down-to-earth terms. He is not directly saying that there are different safe withdrawal rates for different investors. But he is speaking from the same premise that caused me to make that claim.

"What he is saying, in my view, is that it is an artificial exercise to look at historical data regarding what sort of withdrawal rate applies for stocks without factoring in the practical reality that stocks are always owned by people, and people respond differently to different circumstances depending on their particular life goals and financial circumstances. Ignore this factor, and you are looking at only half of what goes into the calculation of a safe withdrawal rate. You can come up with a number without considering this factor. intercst has done that. But that number will have little similarity to the safe withdrawal rate that will apply in the real world...."

"The safe withdrawal rate study, as currently presented, is, in Mark's words, an "abstract" exercise. It is of some theoretical interest. I have noted on the boards many times how I have used the numbers in the study to guide my own investment strategies. It has value. Where it falls apart is when you try to use the conclusions of the study to guide investment decisions in the real world. As a purely theoretical document not considering factors that are important to the determination of safe withdrawal rates in the real world, it cannot be put to that purpose with the expectation that it will produce good results. The Safe Withdrawal Rate study has value as an intellectual exercise, but not as a practical investment-planning tool...."

"To know what sort of safe withdrawal applies to real-life investors, you need to know what sort of investors they are. That's what determines how they will respond to the price drops that make the high growth associated with this asset class possible. Not all investors will respond the same. Those with $10 million in assets will respond differently than those with $1 million. Those with 40 percent stock allocations will respond differently than those with 80 percent stock allocations.

"The historical data suggests that what you do before the stock price drops is the biggest factor that determines how you will respond when they do.
What the historical data suggests is that the worst possible way to prepare is to go with a big stock allocation at a time of extreme overvaluation. The historical data suggests that most investors that do that WILL NOT remain fully invested in stocks as their portfolios diminish. I can't predict the future. I can't say that it is not different this time. All I can do is report what the historical data says. It says the opposite of what the Safe Withdrawal Rate study presumes...."

"My hope is that at some point the board will lose interest in debates about whether stocks are better than other investment classes or not. It's a debate that could continue until the end of time and never be resolved. It can never be resolved because it is a nonsense question. There is no answer to the question "which investment class is best?" They are all best at serving the paricular purposes which they were created to serve.

"You need to know what you goals are to know which investment class is best for you.
Each individual poster addressing the question of "Which investment class is really best?" uses the same data to support his or her arguments, but each approaches the question from an entirely different perspective, a perspective influenced greatly by his or her particular financial circumstances and life goals. They are doing the right thing to do so--it's absurd to try to analyze investment possibilities without allowing these factors some influence--but the fact that each person is working from different understandings of what constitutes investment "success" makes it unlikely that they will convince many others that they are "right." For one person to take his or her definition of investment success and impose it as dogma on the rest of the board is a receipe for frustrated and unproductive dialogue."
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