Beyond Buy-and-Hold #65
By Rob Bennett
In all areas of life endeavor outside of stock investing, the word “safe” has a similar meaning. A trampoline is “safe” if it does not cause injury or death to the kids who jump on it. A food is “safe” if it does not cause sickness. A driving speed is “safe” if it does not cause you to get in accidents. An action is described as “safe” when the chances of a devastating result are small.
That’s not how the word is employed in InvestoWorld.
What do you think it is that aspiring retirees are looking for when they enter “safe withdrawal rate” or “safe retirement” into a Google search engine? They are looking for information that will help them to know whether their retirement plan is almost sure to work. They don’t want to be taking chances on that. A failed retirement is a horrible life setback that they very much want to avoid.
The existing studies do not serve this purpose.
The single biggest factor that determines whether or not a retirement plan will survive
The most important flaw is that they do not take valuations into consideration. The historical return data shows that the valuation level that applies when a retirement begins is the single biggest factor that determines whether that retirement plan will survive or not. The New School retirement research shows that the withdrawal rate identified by the Old School studies as “safe” in fact had only a 30 percent chance of working out for retirement that began at the top of the bull market bubble. It is hard for me to imagine that there is a single retiree who knew how dangerous a move he was taking by electing to use one of these studies to plan his retirement.
The full reality, though, is that the problem goes deeper than a failure to take valuations into consideration. Say that the Old School studies were changed to take valuations into account. Would they then be perfect retirement studies? They still would be flawed studies. The problem with today’s investment research is more fundamental. Most of today’s investing experts simply are not employing the word “safe” in the way that most of the rest of us use it.
The studies presume that the retiree will begin his retirement at age 65 and not live beyond age 95. So they report the withdrawal rate that is sure to last for 30 years. What if the retiree lives to age 96? Or what if stocks perform just a little bit differently than they have in the past? Or what if there were some problem with the assumptions being used in the studies (other than the valuation problem, which is being ignored for purposes of this discussion)?
In any of those cases, the retirements could fail.
Those things are not likely to happen, according to the presumptions employed by the people who crafted the studies. But what if they do? Is it really “safe” to leave no slack in a report of what is safe? Why use the word “safe” in this way? Why not say that there is a good chance that retirements built according to the findings of the studies will survive but that it cannot fairly be said that those retirements are truly safe?
I see five factors behind the generation of all this highly dangerous research.
One, our understanding of how stock investing works is today primitive. The people who we look to as “experts” don’t like to acknowledge that. But it’s true. The people who put these studies together do not know enough about the subject matter to do a better job. Not because they are lazy or dumb. Because our understanding of how stock investing works is today primitive.
Two, there is a great demand for answers delivered with a high degree of confidence. Investors don’t want to hear that a withdrawal rate might or might not be safe. They have their retirements riding on this stuff. So they want certainty. The experts feel pressured into pretending to possess a high level of confidence even when they are experiencing grave doubts about what they are saying.
Three, there is so much money in this field that a code of self-protection has arisen which prohibits one expert from “snitching” on another.
The ideas is that, If you don’t let my customers know that I am expressing much more confidence in what I say than deep in my heart I feel is justified, I won’t let your customers know that you are expressing much more confidence than deep in your heart you feel is justified.
Four, the people making use of the studies want to be fooled in any event. We all want to hear that we will be able to afford safe retirements far sooner than what accurate numbers would show to be the reality. So few of us are inclined to call the experts out on their nonsense.
Five, stocks have been so oversold in the Buy-and-Hold Era that studies using accurate numbers look funny. In January 2000, the safe withdrawal rate for a portfolio comprised of 100 percent Treasury Inflation-Protected Securities (TIPS) was 5.8 percent while the safe withdrawal rate for a portfolio comprised of 80 percent stocks was 1.6 percent. That’s not supposed to happen! So the experts find ways to adjust the methodologies of their “studies” to make it look as though the numbers tell a different story than the unpopular one they really do tell.
Rob Bennett has explored the question of why retirements fail. His bio is here.
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