A Rich Life

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

“An Attitude Born of a Profession that Found Much of its Early Growth in the Middle of the 1982-1999 Era”

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that Michael sent to me on November 25:

Rob,

Thanks for your patience with me on the podcast title. This sounds like a fine solution. And I didn’t mean to undermine your point about experts and expertise – you’ve posed an interesting theory that would be a good discussion (a conversation for another time), but it’s certainly a reasonable premise to explore.

And indeed, I think some of the planning community is starting to open up to acknowledge more of the flaws of Passive Investing. In the “traditional” planner’s view, the greatest risk is to be out of the markets and miss the upside potential (an attitude clearly born of a profession that found much of its early growth right in the middle of the 1982-1999 era). I and some others are trying to change that dialogue, to acknowledge at a basic level that owning a market with incredibly high P/E ratios is ALSO a risky thing to do (arguably, more risky than being out of the markets). Not that this has to be done all-or-none (you’re in the markets or out), but that at a minimum we can make adjustments to better manage risk at the margins and it’s constructive to long-term wealth accumulation and preservation. Of course, the irony is that we may find ourselves back in an ultra-low valuation environment where buy and hold really DOES work pretty well before this is all over; in that case, we’ll just have to see if we can learn our lesson better in advance of the end of the next secular bull market. 🙂

With warm regards,
– Michael

“No One Can Attain True Expertise Because of the Taboo on Pointing Out the Flaws of Passive Investing””

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on November 25:

Michael:

I changed the title of the podcast to “My Conversations with Michael Kitces.” The podcast itself still includes the discussion arguing that no one can attain true expertise today because of the taboo on pointing out the flaws of the Passive Investing model. But the discussion makes clear that this argument is not in any way intended as a dig at you or your abilities. You’ve persuaded me that it is better not to risk confusion among those who only look at the title and then move on. Thanks for sticking with it long enough to bring me around re that one.

I love the first long paragraph of your e-mail. That all sounds real to me. I continue to believe that we very much need to change the ways in which we describe things so that the risks of Passive Investing are made more clear to people. But there is obviously another side to the story or else we wouldn’t have ended up where we stand today in the first place. You are addressing the realities in a clear and understandable and believable way with those words. I have not found too many willing to do that. So I was very happy to see those words appear before me on my computer screen this morning.

Have a great Thanksgiving!

Rob

“A Large Number of People Will Harm Themselves
If They Do Anything Besides Being Passive”

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that Michael sent to me on November 25:

Rob,

Thanks for the follow-up on this.

Just bear in mind that I don’t think you’re EVER going to see a “true” universal consensus on this issue, if only for the simple reason that many people invest so emotionally they WILL ALWAYS make terrible mistakes and do harm to themselves if you ever give them “permission” to not simply hold passively and strategically (or otherwise find a way for them to move active investment control out of their own hands). In other words, it is a reality that a large number of people will continue to do harm to themselves in investing as long as they do anything besides being passive and strategic, because THEIR version of active is counter-productive due to the emotional transactions that take place.

That’s not to say all of this conversation isn’t good, and that we shouldn’t try to move forward – but there IS a very real human reality to acknowledge here. You’d be shocked if you saw the kind of harm I’ve seen people do to themselves as a financial planner by the time they come to our firm, that all would have been avoided if they had simply been passive and strategic and taken their hands OFF their own portfolio. Obviously, I don’t believe that’s a universal prescription – in our firm itself we are active, tactical managers, who believe there’s significant benefit to incorporate valuation into evaluations of investments – but likewise that doesn’t mean that a personal implementation of valuation-driven investment risk management is necessarily going to be effective for everyone either. 

As for the podcast title – I appreciate your efforts, although ironically I don’t think the new one is any improvement. 🙂 Now it just sounds like you’re taking a bigger dig at me – that you’re implying I’m not even an expert (by putting “expert” in quotes), AND that I just don’t get it. A reader without context would probably read it as the equivalent of “My conversations with Michael Kitces, showing that even a well-informed expert like him is just an “expert” who just doesn’t get it”. If these are supposed to be separate, you might clarify that for certain. Something like “My Conversations With Michael Kitces — Also, a look at how even the Best-Informed “Experts” Just Do Not Get It.” I know it’s long, but at least it makes the point that these are separate statements, and that the second isn’t supposed to be a negative reflection on the first. 🙂 In any event, thanks for your efforts to not make this sound like a slam against me. 🙂

With warm regards,
– Michael

“All in the Investing Field are Struggling to Come to Terms with Newly Discovered Realities Today”

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on November 24:

Michael:

I share all of your e-mails with John shortly after I receive them. Shortly before I completed my response to your e-mail of this morning (which I sent a few minutes ago), I received the following response from John re your comments.

“Oops! He has a point.”

John is obviously not even a wee bit biased against me. So I wanted to let you know that he thinks you raise a fair and good point. If the revised title does not address your concerns, please just let me know and I will make additional efforts at changes so that things are said properly.

Here is the response that I sent to John:

“Are you able to expand on your comment?

“I’m in the process of crafting a response to Michael and I did make a small change in the title of the podcast in response to his comment (the new title is “My Conversations with Michael Kitces — Even the Best-Informed “Experts” Just Do Not Get It).” I made that change because I don’t want any newcomer to the site to get the idea that I am making a particular dig at Michael.

“However, I believe that the point that no one is today an “expert” on investing is an important one that stands up to scrutiny. We learn by talking things over with others. I have found it all but impossible to engage in truly fruitful discussion of investing with most others because of the dogmatism that has come to surround the Passive Investing model. Have you not had a similar experience? Do you not think that this reality holds all of us back? Do you not think it holds Michael back, preventing him from achieving a level of “expertise” that would be far more helpful to his clients?

“If the point is that Michael should not be singled out as lacking expertise, I agree (it was never my intent to suggest that but I think the change of wording is appropriate to assure that no one gets the wrong idea). But I really do not see how it is possible for anyone to attain true “expertise” in this field for so long as discussions of the basic realities (the question of whether valuations affect long-term returns is as basic as it gets) are as restricted as they are today.

“Please do not interpret these words as a suggestion that you not say so if you disagree. I very much want to hear your thoughts if you think I am off base re this. I of course want to do the right thing. I just want to balance fairness to Michael with fairness to the middle-class investors who need to know if their expectations re what “expertise” means are not being met today (not in Michael’s case in particular, but
in general).”

My usual practice (as I believe you know) is to post both your e-mails to me and my e-mails to you as entries at my daily blog. In the event that you would prefer that I not follow that practice re any particular e-mail, please just let me know. I see the e-mails as a valuable learning tool for my readers, but I of course do not want to make you feel that you cannot speak to me without what you say going public.

All in the investing field are struggling to come to terms with newly discovered realities today. My sense is that the issue that you and I are talking over in these e-mails is part of that process, a process that down the road will bear good fruit. Thanks for working it as hard as you do!

Rob

“None of Us Can Aspire to “Expertise” in a Meaningful Sense Until All of Us Are Able to Talk More Freely”

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on November 24:

Michael:

Thanks for providing Bill Bengen’s e-mail address. I’ll let you know if anything significant comes from my communication with him.

I of course understand re your time constraints. I did not really expect that you would have time to listen to the podcast. I just thought that the right thing to do was to let you know that it was out there.

I’ve changed the title for the podcast to “My Conversations with Michael Kitces — Even the Best-Informed “Experts” Just Do Not Get It.” I did not AT ALL intend to suggest that you are somehow deficient in the work you do. The reality is quite to the contrary. I applaud you for an understanding of the stock investing realities that I view as being a good bit more advanced than what is evidenced by many of the biggest names in the field.

The point that I am trying to communicate by usually putting the word “expert” in quotes is that there cannot be any such thing as an investing expert until a general consensus is reached re the flaws of the Passive Investing model. Humans learn through interactions with other humans (as is evidenced by your participation at the recent SWR conference, for example). It has become taboo to voice the flaws of the Efficient Market Theory/Passive Investing Model and especially to explore the implications of the realities learned by noting those flaws (that investors MUST engage in long-term timing if they are to have a realistic hope of long-term investing success). Until we get through this difficult transition period from the failed model to one that is more in tune with the state of knowledge possessed by the best-informed investors of today, I do not view it as possible for anyone to achieve the status of “investing expert” in a meaningful sense. Even people like Shiller, who possess a sure grasp of the significance of valuations, are not true experts for so long as they are not able to tap into the brain power of people like Bogle, who are limited in their ability to contribute at this point by their reluctance to abandon the Passive Investing model. We all need the input that the Passive Investing enthusiasts could provide if only they could explore the realities unfettered by continued reliance on the failed model. Until this happens, we cannot achieve our full potential as a community of investors. None of us can aspire to “expertise” in a meaningful sense until all of us are able to talk more freely about all sorts of topics (in my view!)

I hope that clarifies things a bit. I changed the title of the podcast because, after reading your e-mail, it did hit me that a newcomer to the site might not pick up on my intended point and be led mistakenly to think that I was making some sort of “dig” at you. No!

I had an exchange with a fellow at the comments section of the blog today that explores the expertise question a bit (Bogle and Bernstein are the focus of this discussion, not you). It’s something that comes up not infrequently. It’s a big deal, in my assessment.

http://arichlife.passionsaving.com/2008/11/24/podcast-34-my-conversations-with-michael-kitces/

There’s also an earlier podcast (#7) that explores the question as it applies to Bogle. That one is entitled “I Know More About Investing than John Bogle (and You Can Too!).

http://www.passionsaving.com/personal-finance-podcasts.html

I will of course be thrilled to let you know of important developments as The Great Debate continues. I (and all community members) have benefitted a great deal from your generosity in offering so much constructive feedback.

Rob

“I’m Interested in Seeing These Dialogues Move Forward”

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that Michael sent to me on November 24:

Rob,

I’ll have to see what I can do to try to listen to the Podcast. Life is hectic these days, and it’s tough to fit in a 70 minute podcast. 🙂 I don’t know what you cover in the podcast, but I do have to admit that the title sounds rather negative towards me. “My Conversations with Michael Kitces -The Experts Just Don’t Get It” would seem to imply that either I’m an expert who doesn’t get it, or that I’m not an expert, neither of which is exactly positive. Is this what you meant to convey? If not, would you consider adjusting the title to reflect a more constructive light on the conversation?

You can reach Bill Bengen by email at [e-mail address deleted] or via his website at www.billbengen.com.

As for the website discussions, I simply don’t have the time to participate actively in more message boards at this time. The number I try to keep up with as is feels a little mind-numbing when I track it. 🙂 Of course I’m interested in seeing these dialogues move forward, though, so I hope you’ll keep me posted on the progress. 

With warm regards,
– Michael

“A Meeting Place for Financial Planners Looking for an Alternative to Passive Investing”

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An earlier blog entry described the background of my recent correspondence with Michael Kitces on safe withdrawal rates (SWRs). Set forth below is the text of an e-mail that I sent to Michael on November 24:

Michael:

I hope things are going well with you.

I posted a Podcast today summarizing in audio form our e-mail correspondence. I don’t believe that there is anything shockingly new in it, but, since it includes your name in the title, I thought that I should let you know. Please let me know if you have any concerns, or if there are any points that you would like to add.

http://www.passionsaving.com/personal-finance-podcasts-page-five.html

Also, I am seeking to send William Bengen an e-mail asking him for his take re the issues that you and I discussed in our last e-mails (his views on the analytical validity or lack thereof of the Old School SWR studies, his criteria for knowing when to lower stock allocations, his thoughts on short-term timing, any
concerns he is feeling re the Passive Investing model). I was not able to find an e-mail address for him through use of a Google search, only a telephone number. I will try to reach him later today by telephone. But if you have an e-mail address handy, I would be grateful if you would be willing to share it.

Finally, I wanted to briefly repeat the message of my last e-mail. I am very interested in making my site a meeting place for financial planners who are looking for an alternative to the Passive Investing model and the Old School SWR studies. My sense is that you are not ready to participate in any active way at this time and I of course understand. However, it may be that interest in this idea (both on your part and on the part of others) will grow over time. I hope you will keep me in mind in days to come. I believe that we could do a lot of good and important work together to get things back on the right track in all sorts of ways.

Take care,

Rob

“Those…Investing in Equities [Hold] Securities Whose Future Earning Power Is Completely Unpredictable”

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Tuesday’s blog entry set forth the text of an e-mail that I recently sent to Bill Bengen, a financial planner based in California who is a prominent Old School safe-withdrawal-rate researcher. Set forth below is Bill’s response, which was dated November 25, 2008:

Dear Rob:

I actually have been using in my practice results Michael Kitces published recently which relate withdrawal rates to the 10-year trailing S&P 500 index P/E. It filled a gap in my methods and makes a lot of sense. I always knew that starting valuations would affect initial withdrawal rates, but since 1994, when my first research was published, there was virtually no opportunity to utilize the concept, as the markets have been overvalued until very recently. Now, however, retirees will have the opportunity to employ much fuller withdrawal rates than was recently possible, possibly as high as 9% to 10%, depending on how severe a decline the stock market experiences.

I am not using market timing, as my decision to retreat to cash had little to do with any market indicators. Likewise, my re-entry to the market will not be conditioned on any indicators. I am totally unable to call market bottoms, so I don’t even try. I sold all client equities because I perceived an unusually high degree of risk in the economy and the financial system. I was unable to assess the degree of risk. If one can’t assess risk, one can’t manage it. I believe that those who are investing in equities now, or remain invested in them, are in possession of securities whose future earning power is completely unpredictable, owing to changes in American consumer behavior, and the effects of breakdowns in the credit and housing markets. We are entering a completely new world of finance, and I haven’t a clue yet where it will take us. I am waiting to attain a better understanding of likely outcomes before I dip my toe in the water again. I may miss quite a bit of a new bull market, but I missed 2/3 of the bear market (or more, possibly), so I can afford to be patient.

I will check out The Retirement Risk Evaluator when I get a chance. Thanks for bringing it to my attention.

Thanks for your kind words.

Bill Bengen

My E-Mail to Bill Bengen

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William Bengen is a financial planner based in El Cajon, California. He is well known for his work as one of the early researchers using the Old School safe-withdrawal-rate (SWR) methodology for retirement-planning research. Set forth below is the text of an e-mail that I sent to Bill on November 24, 2008:

Mr. Bengen:

My name is Rob Bennett. It’s possible that Michael Kitces mentioned my name when you had dinner with him recently at the SWR conference in Hershey, PA. I am a journalist who has engaged in extensive study of problems with the Old School safe-withdrawal rate (SWR) studies and who now advocates a move to the New School approach (an approach in which SWRs are adjusted for the valuation level that applies on the day the retirement begins). I have engaged in a good bit of e-mail correspondence with Michael re SWRs and related topics. Your name came up in a recent e-mail and I thought that it might be a good idea to run my questions by you.

Here is a link to a New School calculator (“The Retirement Risk Evaluator”)  that I co-developed with John Walter Russell (please note the articles linked to at the bottom of the page):

Link to Retirement Risk Evaluator

Here is a link to John’s site (John did the research that is the engine for the calculator and published it at his site):

Link to John’s site

I of course have great respect for the work you have done in this field. I share William Bernstein’s view that the Old School SWR studies represented “breakthrough research” in their day.

That said, I do not believe that it is possible to calculate the SWR accurately without making an adjustment for the valuation level that applies on the day the retirement commences. My sense is that it was a belief in the Efficient Market Theory and in the Passive Investing model for understanding how stock investing works that flowed from it that is responsible for the failure of the Old School studies to include a valuations adjustment. The academic-research evidence showing that valuations affect long-term returns (and, thus, SWRs) has grown stronger and stronger in recent years. I believe that we need to incorporate these findings into all retirement planning analyses. The alternative (assuming that it really is so that valuations affect long-term returns) is to see millions of failed retirements resulting from the fact that people are planning their retirements without taking valuations into account.

I saw the article at Bloomberg.com stating that: “Bengen also is keeping his clients out of equities. Normally, he says, he believes in traditional asset allocation, but ‘this is one of those rare instances when duck-and-cover is appropriate.’ ”

Is this accurate? It sounds as though you are advocating short-term timing. I’d be grateful for any expansion on those comments that you care to put forward that would help the readers of my blog understand better your views as to when short-term timing is appropriate and whether you believe that reliance on short-term timing undercuts the theory behind the use of SWR studies (the common view is that these analyses work only for those who maintain their initial stock allocations at times of big price drops).

My personal view is that short-term timing does not work but that long-term timing does work (long-term timing is a policy of lowering one’s stock allocation at times of extremely high prices with an understanding that benefits may not be seen for doing so for as long as 10 years). I’d also be interested in hearing (and reporting to my readers) any reactions you have to The Retirement Risk Evaluator, which implicitly supports the long-term timing concept (by showing how much higher the SWR is at times of low or moderate prices).

Thanks for the groundbreaking work you have done in the SWR field and for any  thoughts that you are able to offer in response to these questions.

Rob

Internet Harassment by “Defenders” of the Conventional Retirement Studies

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I’ve added an article entitled Internet Harassment by Defenders of the Conventional Retirement Studies to the “Banned at Motley Fool!” section of the site. The article sets forth the text of an e-mail that I sent to my congressman urging government action to deal with the problem of internet harassment and outlining the intimidation tactics that have been employed to block those seeking to engage in honest and informed discussions of the analytical errors of the Old School safe-withdrawal-rate studies and of the effect of valuations on long-term stock returns in general from doing so.

Juicy Excerpt: The intimidation is achieved through the vilest means imaginable. I have seen threats to kill me, my wife and my children. I have seen posts charging falsely that I engage in plagiarism. I have seen posts claiming falsely that my parents were alcoholics. I have seen posts claiming that I stalk women. I have seen posts claiming that my wife has left me. When I have been quoted in newspapers, the Goons have sent e-mails to the reporters who wrote the articles or to their editors making false claims about my financial status. When bloggers report favorably on my writings or my calculators, the Goons put forward suggestions that new web sites will need to be established to ridicule these people. In cases in which these people do continue to report positively on our community’s findings, these threats are carried out. I have had malicious “reviews” of my book posted at web sites and at Amazon.com. The obvious intent of these efforts is to intimidate people who show an inclination to discuss our community’s findings on retirement and on stock investing in general from doing so.