A Concise Explanation of the SWR Dispute
Posted: Tue Dec 17, 2002 5:34 am
This post is intended as a response to Dagrims and Andrew61 and Galagan and CrazyLegs883 and StubbleJumper and a few others who in recent weeks have requested a concise explanation of the core dispute in the debate about safe withdrawal rates that has been going on for some time at the Motley Fool's Retire Early Home Page board and that is now being discussed here from time to time as well.
The post linked below sums up the problem.
http://boards.fool.com/Message.asp?mid=18237425
Intercst says here that "I've made no assumption about the [statistical validity of the] data" used in the SWR study. He notes that he has not tried to determine "Is it skewed in some way?" Thus, he is not able to assign a statistical confidence interval" to his claim that the SWR is 4 percent. All he really knows for sure is that "the study does what it says it does."
Think about that last statement for a moment. How hard is it to prepare a study that "does what it says it does?" Not hard at all so long as you do not limit yourself to statements that can be supported by a valid use of data. I could issue a study this afternoon claiming that I will show by reference to data that the earth is flat, and, so long as I permit myself the use of data with no scientific validity, the study would indeed "do what it says it does." I could then claim "100 percent certainty" that my study does what it says it does. That wouldn't really prove that the earth is flat, would it?
The thing that keeps a researcher honest in his claims, the thing that makes a study science and not conjecture, is the use of valid data. Intercst has not determined whether his data is suitable for answering the question examined in the study, so he has not engaged in a process that merits the designation "science." By using whatever data he wanted to use, regardless of whether it was a valid way to answer the question or not, he has presented his personal opinion on safe withdrawal rates, nothing more.
Several posters at this board have made attempts to determine how statistically valid the intercst study is, and the answer that has come back is, "not very." There are probably some circumstances in which a 4 percent withdrawal rate applies. But it appears that that has been the exception in recent years rather than the rule. In any event, there are few circumstances in which the "optimal" stock allocation is 74 percent. In most cases, it appears that the optimal allocation is something close to 50 percent.
The bottom line is that the intercst study doesn't provide you with much help in your task of determining the safe withdrawal rate for your investment plan. What are we to do now that we know that, toss the intercst study in the trashbin? I don't think that's such a hot idea. Despite its lack of statistical validity, the intercst study does provide some valid insights. It is not the final word on the question it examines, but so long as you understand the study's limitations, it can prove helpful in your effort to put together a successful plan. You would be a fool not to make use of it.
The logical thing to do is to make use of the intercst study, but to supplement what you learn from it with insights obtained from other sorts of studies that shed light on the questions that the intercst study ignores. Members of the REHP board community have raised lots of questions they would like to know more about--whether real estate could be an effective Retire Early investment, whether it makes sense to diversify by investing in international stocks or small cap stocks, whether it is possible to benefit from taking a little off the table in times of extreme Price/Earnings ratios, and so on. Exploration of these questions would bring the REHP board to life because it would permit for an increase in on-topic posting, something that has been in short supply there for a long time now.
But intercst and some others who post at that board do not believe that such discussions should be permitted. The argument they offer is that most studies looking at alternative investment stratgies are in some way imperfect. Perhaps all the data needed is not available, or perhaps it is available going only 20 or 30 years back, or whatever.
It is true that most of the data we need to look at is imperfect in some way. However, most of this data possesses at least as much statistical validity as the intercst study data, and much of it is more valid than that data. So it is a double standard to say that the REHP board may debate the intercst recommendations but not the data supporting alternatives to the intercst recommendations.
Posters at the REHP board are permitted to put up posts describing alternative investment strategies. The problem comes when they try to engage other community members in discussions of the merits of these strategies. At this point, the group that seeks to limit debate to the intercst recommendations engages in four posting practices prohibited under the TMF posting rules--disruption, deception, personal attack, and ridicule. Most sensible posters stop participating in the threads once this happens, and the community members seeking a reasoned discussion of alternatives are blocked from achieving their goals.
What is needed is an expression of community will at the REHP board to permit fair discussion of a variety of investment strategies. I have tried a number of approaches to bring that about, and have not yet been successful. The next thing I want to try is to have this board develop a Frequently Asked Questions (FAQ) statement on SWRs, and then take that FAQ statement to the REHP board and request that the community there endorse it as their own FAQ. My hope is that, with a FAQ statement to point to as support, REHP community members seeking a discussion of investing alternatives will have greater success obtaining a fair hearing for their ideas.
The key issue in dispute is, should there be a double standard at the REHP board, so that only the intercst study is exempt from a general rule prohibiting debate on data that possess some statistical imperfection? Or should the board be run by Motley Fool rules, which would allow any poster with insights or data to offer that would help other community members plan successful early retirements to put his or her ideas or data forward for the full community's consideration?
The post linked below sums up the problem.
http://boards.fool.com/Message.asp?mid=18237425
Intercst says here that "I've made no assumption about the [statistical validity of the] data" used in the SWR study. He notes that he has not tried to determine "Is it skewed in some way?" Thus, he is not able to assign a statistical confidence interval" to his claim that the SWR is 4 percent. All he really knows for sure is that "the study does what it says it does."
Think about that last statement for a moment. How hard is it to prepare a study that "does what it says it does?" Not hard at all so long as you do not limit yourself to statements that can be supported by a valid use of data. I could issue a study this afternoon claiming that I will show by reference to data that the earth is flat, and, so long as I permit myself the use of data with no scientific validity, the study would indeed "do what it says it does." I could then claim "100 percent certainty" that my study does what it says it does. That wouldn't really prove that the earth is flat, would it?
The thing that keeps a researcher honest in his claims, the thing that makes a study science and not conjecture, is the use of valid data. Intercst has not determined whether his data is suitable for answering the question examined in the study, so he has not engaged in a process that merits the designation "science." By using whatever data he wanted to use, regardless of whether it was a valid way to answer the question or not, he has presented his personal opinion on safe withdrawal rates, nothing more.
Several posters at this board have made attempts to determine how statistically valid the intercst study is, and the answer that has come back is, "not very." There are probably some circumstances in which a 4 percent withdrawal rate applies. But it appears that that has been the exception in recent years rather than the rule. In any event, there are few circumstances in which the "optimal" stock allocation is 74 percent. In most cases, it appears that the optimal allocation is something close to 50 percent.
The bottom line is that the intercst study doesn't provide you with much help in your task of determining the safe withdrawal rate for your investment plan. What are we to do now that we know that, toss the intercst study in the trashbin? I don't think that's such a hot idea. Despite its lack of statistical validity, the intercst study does provide some valid insights. It is not the final word on the question it examines, but so long as you understand the study's limitations, it can prove helpful in your effort to put together a successful plan. You would be a fool not to make use of it.
The logical thing to do is to make use of the intercst study, but to supplement what you learn from it with insights obtained from other sorts of studies that shed light on the questions that the intercst study ignores. Members of the REHP board community have raised lots of questions they would like to know more about--whether real estate could be an effective Retire Early investment, whether it makes sense to diversify by investing in international stocks or small cap stocks, whether it is possible to benefit from taking a little off the table in times of extreme Price/Earnings ratios, and so on. Exploration of these questions would bring the REHP board to life because it would permit for an increase in on-topic posting, something that has been in short supply there for a long time now.
But intercst and some others who post at that board do not believe that such discussions should be permitted. The argument they offer is that most studies looking at alternative investment stratgies are in some way imperfect. Perhaps all the data needed is not available, or perhaps it is available going only 20 or 30 years back, or whatever.
It is true that most of the data we need to look at is imperfect in some way. However, most of this data possesses at least as much statistical validity as the intercst study data, and much of it is more valid than that data. So it is a double standard to say that the REHP board may debate the intercst recommendations but not the data supporting alternatives to the intercst recommendations.
Posters at the REHP board are permitted to put up posts describing alternative investment strategies. The problem comes when they try to engage other community members in discussions of the merits of these strategies. At this point, the group that seeks to limit debate to the intercst recommendations engages in four posting practices prohibited under the TMF posting rules--disruption, deception, personal attack, and ridicule. Most sensible posters stop participating in the threads once this happens, and the community members seeking a reasoned discussion of alternatives are blocked from achieving their goals.
What is needed is an expression of community will at the REHP board to permit fair discussion of a variety of investment strategies. I have tried a number of approaches to bring that about, and have not yet been successful. The next thing I want to try is to have this board develop a Frequently Asked Questions (FAQ) statement on SWRs, and then take that FAQ statement to the REHP board and request that the community there endorse it as their own FAQ. My hope is that, with a FAQ statement to point to as support, REHP community members seeking a discussion of investing alternatives will have greater success obtaining a fair hearing for their ideas.
The key issue in dispute is, should there be a double standard at the REHP board, so that only the intercst study is exempt from a general rule prohibiting debate on data that possess some statistical imperfection? Or should the board be run by Motley Fool rules, which would allow any poster with insights or data to offer that would help other community members plan successful early retirements to put his or her ideas or data forward for the full community's consideration?