PassionSaving.com Home Page : The Financial Freedom Blog : January 2007
January 8, 2007 11:09 – The Latest on SWRs
There was a thread focused on the Norm Goldman review of my book Passion Saving at the Vanguard Diehards board last week. Set forth below is the text of a post (Post #29) that I added to that thread:
The reality is that I paid for the expedited review.
It’s not my belief that Norm Goldman writes the reviews at his site for the money it brings in. I didn’t spend much time checking it out, so it’s possible. It seems to me that there are things that he could do for money that would bring in more than charging $100 for expedited reviews and doing others for free. Again, though, I didn’t check it out. If there is someone who wants to spend a considerable amount of his or her life energy checking it out, he or she should go ahead and do so.
To what purpose, though?
Why is this an issue?
People are trying to suggest that my book is not a wonderful book because I paid for an expedited review. It doesn’t follow. As one poster in this thread noted, what makes the book wonderful or less than wonderful is the content.
I know that the content is wonderful for several reasons. One is that I have high standards for the work product that I put out, and the “Passion Saving” book is the best thing I have ever produced.
Another is that I saw the reaction at the Motley Fool board when I introduced the Passion Saving concept to the community there. One of those posts caused the size of the Retire Early board there to triple in size in one day! The board quickly became the second most popular in the history of the entire site. We had hundreds of people contributing quality on-topic posts on an exciting topic on a daily basis. I had thousands of people giving recommendations to my posts and telling me that the ideas that I shared with them had changed their lives for the better. Is there someone who is going to argue that all of these people were being paid to say these things? I don’t buy it.
I have had other reviews of my book far more positive than the one that Norm Goldman wrote. You can see those at my site. I’ve had people who don’t like it that I am the one who discovered the flaws in the conventional methodology studies say that those reviews were paid for too. Of course it is absurd to think that I would have the financial resources to pay off the number of people that I would have had to have paid off to get the number of positive comments about the book that appear at my site. Most people will not compromise their personal integrity for money. Those that will generally charge more than I am able to pay.
And of course there are clues that you can look for in the content of a review or a comment on a book to determine whether the thoughts expressed are genuine. There is a woman who wrote after reading my book that “my mind is on fire!” And then she explained in some detail changes that she had made in her life after talking over with her husband what she learned from reading the book. These are not the comments of someone who was paid to write positive comments on a book.
The people who engage in this sort of ugliness make my book look bad and make me look bad and make my ideas on investing look bad. They do something else too. They make themselves look bad. They make this forum look bad. They make human beings look bad. These are low tactics. No investing viewpoint is so important that “defense” of it should cause a human being to resort to these sorts of tactics.
I sent Michael Leboeuf a copy of my book a long time ago. If there are people who want to know whether the book is good or not, why not ask Michael? He is a published author. He is a respected member of this community.
If there is someone else in this community who would like to take on the task of reading the book and reporting on it to the community, I will be happy to send that person a free copy.
There are people today linking to the John Greaney review. Greaney has publicly acknowledged that he wrote his “review” without bothering to read the book. What does that say? Is such a review more trustworthy than a review for which a fee was paid to have it done on an expedited basis? I say “no.”
I am the poster who discovered that Greaney got an important number wrong in a study that he published on his web site in 1996. I did the right thing by pointing out that error. That error will cause hundreds of thousands of busted retirements in days to come (assuming that stocks perform in the future somewhat as they always have in the past) and it is my life’s work to help protect people from advice that causes them to suffer busted retirements.
I honored my responsibilities to my community. I don’t apologize for it. The fact that it makes some unhappy that I pointed out the flaws in the Greaney study (and in all other conventional methodology SWR studies) does not make my book on saving a bad book. It is a wonderful book. I am confident that any fair-minded person who reads it will come to a similar conclusion. Many already have. Many more will do so in days to come. More on This Topic
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January 9, 2007 16:07 – Hocus Goes Electric
Okay, this one really is about the latest on SWRs. Here is a list of my favorite posts to a recent Vanguard Diehards thread:
- #4. JohnDCraig points out that Robert Shiller “must really be stupid” for thinking that P/E10 is a sound valuation assessment tool. True Believers react to Shillers book in much the way in which a vampire reacts to a crucifix. Shiller did us all a huge favor in showing the courage to talk straight about the effect of valuations on long-term returns. How much in the way of thanks has he gotten for going to the trouble? How many of today’s “rational” investors refer to him as “Saint Robert” (as they refer to Bogle as “Saint Jack”)?
- #34. Earnabuck points out that my reporting that we have seen an average price drop of 68 percent on the three earlier occasions when valuations rose as high as they are today is not a prediction but a statement of historical fact. There’s a difference.
- #56. Allan says: “I too think valuations matter, I just haven’t figured out what to do with it.” I think he speaks for a number of people in saying this. My answer to the “What to do?” question is “lower your stock allocation.” I think it would be fair to say that this answer (which strikes me as being an obvious response to the problem of overvaluation) is met with a good bit of resistance in some quarters. I would like to come to a better understanding of why that is so.
- #135. JeffreyScott says: “I would not use this or any other metric as an on/off switch for stocks…instead, maybe a dimmer switch.” That’s the sort of sensible talk that I wish we would see put forward more frequently.
- #194. Chip says that: “The whole thing boils down to whether Rob is able to buy back in at a valuation level that turns out to have been low enough to warrant his absence from the market over the past decade.” He adds that: “My guess is that, surprisingly, he actually will. Wouldn’t that be a crack-up if what Rob is doing actually worked? I think people would be really mad.” I think it reflects poorly on humans that he is probably right about that. Investing fears bring out the worst in people. I hope that we Dolphins can do something to change that in days to come.
- #216. Chris threw us a nasty curve when he asked: “Can you envision the investors in Egypt and Argentina who rubbed their hands with glee when their markets dropped by 50%?” He then added: “Shortly thereafter, their equity markets dropped to zero. So much for buying on sale.”
- #220. Russell asked whether Japanese stocks are now cheap.
- #285 Bob offered a quote from David Dreman about market correlations and predicting the future that is worthy of further examination.
- #316. I discuss the dogmatism issue. I disdain dogmatism in investing strategies. I am dogmatically opposed to dogmatism. Is that a contradiction?
- #389. John Walter Russell says that “Rob’s message is gaining acceptance.” I think that’s so. It’s happening at the pace at which a turtle runs a marathon, to be sure.
- #395. I love words, but investing discussions tend to contain too darn many of the little buggers. John Walter Russell often steps in to present numbers that put the words to shame. It picks up the pace of the discussions when he does that. I like it when he does that.
- #397. Mel Lindauer offers me “fatherly advice.” Do you remember when Pete Seeger picked up an ax to cut the cord when Dylan went electric at that famous folk festival? When Dylan asked “How does it feel to be on your own?” he was talking about himself.
- #398. John Walter Russell says that I am doing “exceedingly well.” And he’s a Numbers Guy and everything!
- #417. Allan complains that I have found fault with people like Jeremy Siegel. I used to worry about this, so I am glad that he brought it up. Siegel is human like the rest of us. Why should he not be permitted to partake in a learning experience? I don’t mean that sarcastically. When we start thinking that people have risen so high that that may not be questioned, it does them harm.
- #418. Earnabuck asks whether posters other than me should also be required to take their kids to Disney World before they are permitted to express their investing views. That’s a funny question. It does a good job of summing up the craziness.
- #428. I explain what a trip to Disney World means to me and my family. I think this post does a good job of pointing to the source of the power of the Passion Saving approach. It is an approach that integrates life, work and money goals. It is a holistic approach to money management.
- #431. SmartSometimes points out that: “They laughed at Columbus, they laughed at Fulton, they laughed at the Wright brothers. But they also laughed at Bozo the Clown.” It’s important to stay humble, eh?
- #442. Bob puts up a fine straight-talk post noting that the core point in contention is whether or not we can assume that market prices are generally a fair representation of fair value. It’s a turtle, dude! More on This Topic
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January 10, 2007 15:51 – A Thinking Person’s Lottery Ticket
Why are lottery tickets so popular? It’s not because the people who buy them don’t understand that the odds are against them, that most of those who buy tickets end up financial losers. The appeal is that lottery tickets offer the possibility of life transformation.
Working overtime to add a few extra thousand to your income is not going to cause a noticeable change in the nature of your daily existence. It might allow you to buy some new clothes or to take a nice vacation, but a few thousand extra is not going to change a humdrum existence into an excitement-packed one. A lottery jackpot might.
A rational case can be made for buying tickets on grounds that the lottery offers you the one chance you have as a middle-class worker to obtain the financial windfall you need to be able to do what you really want to do with your life. The promise of a lottery ticket is the same as the promise of Passion Saving, an early escape from wage slavery.
Passion Saving is a thinking person’s lottery ticket. When you are saving for the things that a Passion Saver saves for, your money management efforts are directed at the same sort of goal for which a lottery ticket purchaser purchases a lottery ticket. The difference is that the chances of success are far more in your favor when you save your way to freedom than when you try to get there via gambling.
It’s not possible to calculate the full price of a good cup of coffee because part of the cost you pay when acquiring an expensive coffee habit is the loss of the ability to see how your limited pool of Opportunity Dollars can be used to supply the same sort of qualitative life changes more often sought in purchases of lottery tickets. It is only by experiencing for yourself the magic of Passion Saving that you can come to understand fully what you give up when you fall into the habit of pursuing little luxuries that come with a surprisingly big price-tag attached. More on This Topic
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January 11, 2007 15:04 – Compounding Doesn’t Work
The old money management rules have failed us.
Compounding doesn’t work. That’s a bold statement. But there is an important sense in which it is true. So it needs to be said.
There is also a sense in which it is not true, of course. Compounding does work in a literal sense. The charts you see showing you how much money you earn by letting a dollar of savings grow over time point to something real and important. Watching your investment returns compound over time is one of the great joys of effective money management.
It’s the other side of the story that is my primary concern here, however, because that is the side so rarely remarked on. There is an important sense in which compounding does not work. Compounding does not work in motivating people to save. Everyone has seen those charts with the awe-inspiring numbers. Few save as much as they would like. Many save nothing. If the purpose of the charts is to entice people to save, they are not doing the job.
Why?
It’s because compounding takes too long to work its magic. People are motivated by things that they believe are likely to happen within a reasonable amount of time. Compounding takes years to produce noticeable results. People should be thinking about compounding when they decide how much to save, but they should not be using compounding as the primary motivator for their saving efforts.
Imagine a car manufactuer who came out with the best car ever produced. It is hot looking. it has a powerful engine. it is the least expensive car on the market. Everyone would want to buy it. Now say that the car manufacturer requires that those who want this car file an application, put some money down, and then wait 30 years for delivery. Under those circumstances no one would want it. People who want cars want cars now or in the near-term future. The greatest car in the world holds little attraction if the delivery date is too far in the future.
It’s the same with saving. We all love the idea of seeing our money earn money for us. We all “get” compounding, despite the patronizing suggestions you often see in personal finance articles suggesting that we don’t. We get it but we don’t act on it because, as wonderful as compounding is, we need quicker results. I don’t think we are wrong to insist on quicker results from our saving efforts. I think it makes sense to want to enjoy at least some of the benefits of saving either immediately or in the near-term future.
That’s why the Passion Saving approach to money management provides short-term as well as long-term benefits. Passion Saving makes use of compounding, just as does the conventional Sacrifice Saving approach. But Passion Savers do not look to compounding as their primary motivator. They are motivated to save by the greater freedom to call the hours of the day their own they expect to see within five years or so as a result of their saving efforts.
Compounding does not work as a motivator. That’s the core flaw of the conventional approach to money management. More on This Topic
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January 12, 2007 11:57 – Credentials
What sort of credentials are needed to write a quality book on how to invest?
It’s a question that I’ve needed to devote some thought to as I am in the process of writing such a book (Investing for Humans: How to Get What Works on Paper to Work in Real Life)
Set forth below is the text of a post (#28) that I added to a thread at the Vanguard Diehards board focused on the question of whether I possess the credentials needed to offer advice on investing topics:
On the credentials question, there is a legitimate point that can be raised. I haven’t managed a multi-million dollar fund, like Peter Lynch. I wasn’t a stock broker, like Suze Orman. I lack credentials that some others possess.
But this is not all that uncommon in this field. Bernstein was a doctor before he started writing about investing. He’s great, right? His “credential” at the time he was making his name is that he studied this stuff and came to understand it and then did a good job of explaining it on the internet. Sound familiar?
My personal take is that I possess a credential that Suze Orman and Bernstein and Peter Lynch and all the others lack. I possess an understanding of the human side of investing that these people do not possess. It’s important that there be people out there with the credentials that they possess. It’s also important that there be someone out there with the credentials that I possess. Now there is!
There’s a reason why there is not a book called Investing for Humans available in bookstores today. There’s a reason why no one questioned the conventional methodology SWR studies before I did. There’s a reason why there was no Stock-Return Predictor available before John and I put that calculator together. There’s a reason why no one before me thought of combining the insights of Buffett (value investing) with the insights of Bogle (indexing).
It’s not that people like Bernstein and Lynch and Orman are lacking in I.Q. points. That’s not a problem, okay? It’s something else.
Whatever you want to call that “something else,” that’s what I bring to the table. When I started school, I majored in psychology. Then I switched to pre-law with the goal of becoming a crusading journalist. Combine the skills needed to succeed in psychology, crusading journalism and law, and you’ve got me. That’s Rob Bennett, you know?
There’s never before been a Rob-Bennett-type writing on investing. I think that’s too bad. I think that the take that I provide is much needed. Some others could live without it. I of course get that.
The point here is — I do not possess every credential that could ever be employed to write about investing. But I do possess credentials to write in this field. My take is that I possess the credentials that are needed to generate work that is fresh and valuable at this time in the growth of our understanding of how long-term investing works. That’s a subjective call. People are of course entitled to have other takes. But the question here is not whether I possess credentials or not. It is — What sort of credentials are the best credentials for someone writing in this field?
I am a different sort of investing advisor offering a different sort of investing advice. I ain’t no Numbers Guy. I’m an Emotions Guy. I’m the guy who says that emotions trump numbers when it comes to determining what matters most to attaining long-term investing success. More on This Topic
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January 17, 2007 09:19 – Is Passion Saving Truly Something New?
The BookPleasures.com review of Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work questions whether the money management approach urged at this site is truly something new. Norm Goldman argues that “Passion Saving merits attention, as it underscores that our present-day money management practices haven’t changed to keep up with the transformation that has taken place in the economy” and adds that, “personally, I have to agree with Bennett as I have practiced the Passion Saving method for over forty years with excellent results.” He bluntly observes, however, that “Bennett’s Passion Saving method may not be new.”
He’s wrong. Passion Saving is something new.
My guess is that Goldman’s positive saving experiences have dulled his abilities to appreciate the most important distinction of the Passion Saving approach. Goldman told me in an e-mail that he has not had good experiences trying to convince people of the merits of his good saving practices. I’ve noticed that good savers often are perplexed as to why others don’t save as well as they do, and that in time they often conclude that others are just not genuinely interested in doing so. They dismiss poor savers as a lost cause and conclude that there’s just some indefinable something that makes some good savers and some poor ones.
The purpose of Passion Saving is not to offer money management tips. There are other books that do a great job at that task and I did not see that much purpose would be served by writing one more. Passion Saving is not primarily a “how to.” It is primarily a “why-to.” Passion Saving is an entire book dedicated to the question of why you should save. That’s what makes it different. I’ve read just about everything on the topic, and there is nothing else like this out there today.
The question that comes to the mind of many people on reading the above paragraph is — “Why the heck do I need a book to tell me why I should save?” Some might think: “I want financial freedom. I want a comfortable retirement. I know darn well why I should save, I just haven’t been able to figure out how to do it given the amount of money I am making today. I don’t have time for some pointless book on theory, for heavens sake!”
I say you do need a book on theory. Practical implementation steps are of course important and the book does of course include discussion of practical implementation steps. The key problem that most people have saving is not in the area of practical implementation steps, however. Where most people are going wrong today is in how they perceive the act of saving; most people do not possess a clear understanding of what saving is. Fail to get that first theoretical step right, and you never even get to a point where the practical implementation steps matter.
Those who are well-motivated to save, save well. I do not know of any exceptions. Those who are not well-motivated to save, do not save well. Again, I do not know of any exceptions. Motivation is key. Motivation is everything.
Asked “Would you like to save effectively,” you no doubt say “yes.” That doesn’t mean that you are well-motivated. That just means that you are not a numbskull. Someone who is truly well-motivated to save does it. Someone who is truly well-motivated to save saves.
If you are not saving effectively today, you are not well-motivated to do so. That’s my take. That’s why I focus on the motivational part of the process.
Goldman is one of those people who just happened to have life experiences that caused him to become well-motivated to save. For him, it was easy. So, to him, there’s probably not even much need for a book on how to save. In the minds of many, those who have the self-discipline needed to save, do it. Those who don’t, don’t. Thats pretty much it, according to one point of view (I am not sure that this is Goldman’s viewpoint, I am speculating that it might be).
I don’t share that view. Passion Saving argues that the only money management strategies that work are customized money management strategies. What works for one does not work for another. What works for Norm Goldman does not necessarily work for you. Identify a saving goal that turns you (and only you) on, and you’ll save. That’s the breakthrough. That’s the thing that the conventional money guides miss. You need to care intensely about attaining your financial freedom goal quickly.
I discovered the Passion Saving approach through personal experience. I was a poor saver when I followed the conventional approach (I call it “Sacrifice Saving”). I started saving to attain a change in my life that I very much wanted to attain, and I became an effective saver overnight. I had no trouble figuring out all of the practical implementation steps (with the help of some of the great books that were already available back then) once I cared enough to bother checking them out.
It was something else that lit a fire under Norm Goldman. I don’t know what. But, whatever it was, it was something that lit his fire, not mine.
For you to save effectively, you need to find out what saving goal lights your fire. It’s as simple and as complicated as that. That’s what it takes. Do that, and nothing will be able to stop you. Fail to do that, and all the saving tips in the world won’t get you to first base.
You can google the phrase “saving tips” and come up with hundreds of good ideas. That’s not going to help make you one of The World’s Great Savers.
I cannot tell you what saving goal it is that is going to turn you into the next of The World’s Great Savers. I can’t put it in a tips list. For it to work for you, you need to be the one who identifies it. The purpose of my book and of the saving articles at this site is to tell you what you need to know to get about the business of figuring out for yourself how saving can in many circumstances offer a more compelling value proposition than spending.
It’s the “you have to figure it out for yourself” part that is new. I don’t pretend that the same tips that worked for Norm Goldman will work for you too (what tips will make sense will in part depend on what saving goal you elect to pursue). I point you to the path that helps you learn how saving can become as exciting an activity for you as it is for Norm Goldman. And for me. And for all of the others of The World’s Great Savers.
That’s something different. That’s something new. That’s something that actually works. More on This Topic
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January 19, 2007 13:49 – Jonathan Should Take a Tip from Dustin
Here are some words from this Wednesday’s “Getting Going” column, written by Jonathan Clements of the Wall Street Journal:
“You might limit your initial portfolio withdrawal rate to just 3% or 4%, equal to $3,000 or $4,000 for every $100,000 saved. This is well below the 5% and 6% withdrawal rates that used to be advocated and reflects, in part, a concern about today’s lofty stock valuations and low after-inflation bond yields.”
He goes on to cite William Bernstein’s view (Bernstein is one of the leaders of the New School of SWR analysis, a school that understands the need for including valuation adjustments when calculating SWRs) that those following the infamous “4 percent rule” urged by the authors of conventional methodology studies are “pushing it,” given what the historical stock-return data tells us about the effect of valuations on long-term returns.
The last time in which I wrote about Clements was to report on my correspondence with him in which I urged him not to provide links to conventional methodology studies without pointing out to his readers the grave dangers of planning retirements pursuant to the findings of those studies. At the time, the best that I could get out of Clements was an acknowledgment that the conventional studies are “not the last word in SWR analysis.”
I think it would be fair to say that Clements is growing in his understanding of just how dangerous the conventional methodology studies are to the hopes of middle-class investors to enjoy safe retirements.
I think it would also be fair to say that he is not growing fast enough.
The stakes here are enormous. If Bernstein is right in what he says about SWRs (he is — we have checked this every which way it can possibly be checked over the course of our discussions of the past five years), the demonstrably false claims put forward in the conventional SWR studies are likely to cause hundreds of thousands of busted retirements in days to come.
I’ve worked as a reporter for over two decades. We in the journalism trade have a term of art that we use to refer to what we have found when we discover that there are studies that report numbers wrong and that getting these numbers corrected can save hundreds of thousands or even millions of our readers from experiencing great pain. In reporter lingo, we call that sort of thing “a story.” Sometimes we refer to it as “news”
Jonathan Clements has discovered himself a story. Jonathan Clements has run smack dab into some news.
It’s not just any old story. The SWR story that Clements has stumbled onto is the biggest and most important and most far-reaching investing story of Clements’ lifetime.
You wouldn’t know it by reading his column.
Reading his column, you would think that learning the truth about SWRs was just about exciting enough to Clements to cause him to roll over and see if he could extend his afternoon nap for another 20 minutes. It’s not my intent to be harsh. I’m calling it the way I truly see it. Clements writes about SWRs as if the false SWR claims that have been repeated in thousands of investing articles over the years (including articles with Clements’ name on them) were no big deal. Who cares about a few hundreds of thousands of busted retirements anyway, you know?
I care.
I hope you care too.
I hope that, working together, we can get Jonathan Clements to care.
If Jonathan Clements cared about his readers and their financial concerns, he would not be reporting what he has learned about SWRs in recent months in the “Getting Going” column. If he cared about his readers, he would have gone to his editors and told them that he had come across something that belonged on the front page, not in a column in the investing section. He would have called trustworthy sources to find out how this sort of thing could ever have happened. He would have checked the data himself and thought through the implications of what he has learned in recent months. He would have done his job.
Clements cares to some extent. You know that and I know that. He doesn’t care enough. If he cared enough, he would be showing a whole big bunch more curiosity than he has been showing thus far about getting to the bottom of the story that middle-class investors cannot today count on even a reasonable degree of accuracy from most of the studies that pop up when they enter the phrase “retirement planning tool” into a search engine.
I can’t see into Clements’ mind to tell you why he does not care enough to research and write up this news properly. But I’ll give you my theory as to what is going on.
My sense is that Clements generally possesses at least a vague belief in the Efficient Market Theory. If that’s so, there are probably all sorts of alarm bells that go off in his head when he learns that the conventional methodology studies get the SWR number wildly wrong. If the Efficient Market Theory were on the mark, the methodology used in these studies would work. The fact that the numbers are so wildly off the mark tells us something not just about withdrawal rates but also something about the now-dominant theoretical model of how investing works. Jonathan Clements hasn’t just discovered that the conventional methodology studies are going to cause hundreds of thousands of busted retirements. He has discovered that the model he has been using to try to understand investing for years now is flawed right down to its core.
Yikes!
And double yikes!
Jonathan Clements is scared. That’s my take. He is looking for someone else to be the one who brings down the big bad Efficient Market Theory. He is afraid that, if he took on that one, people would laugh at him. He is afraid that people would get angry with him. He is afraid that he would be biting off more than he could chew. He is afraid that, when it came time to defend his views, he might not be able to do it by himself and there might not be many others stepping forward to help out; he might get something wrong and embarrass himself.
I know the feeling.
When I get that feeling, I recall to mind the lyrics of the song “Hey Jude.” Now, don’t you know know that its just you? Hey, Jonathan, you’ll do. The historical data you need is on your computer.
Do you remember Watergate? Robert Redford and Dustin Hoffman were reporters for the Washington Post. They started with a story about a break-in of an office, but, as they followed the leads, the thing just kept getting bigger and bigger and bigger. They ended up taking down a president. I forget the guy’s name. Was it Melvyn Douglas?
Had Redford and Hoffman started out with the idea of bringing down a president, it would not have worked. The sort of person who starts out with an idea like that is a crazy person. A normal person is scared over the idea of being the one to bring down a president or to show that the Efficient Market Theory is a pile of bull (in more than one sense of the word).
It’s understandable that Clements is scared. Who wouldn’t be, faced with the implications of the story that he has stumbled onto? It’s not acceptable behavior on his part not to follow the leads where they take him, however. Again, that’s his job.
Clements should rent the movie All the Presidents Men. He should reflect on what it is that caused him to go into the field of financial journalism in the first place. He should watch how Redford and Hoffman did it. They didn’t try to swallow the entire enchilada in a single bite. They wrote up what they knew at the time they came to know it. Each little story led to another little story. In time, all the littles turned into something very, very, very big. That’s how journalism works, when it works.
Jonathan Clements has the opportunity before him to become the Dustin Hoffman of InvestoWorld. Let’s all be sure to say a prayer tonight that he doesn’t let it slip away from his grasp by moving too slowly.
Do we even dare to imagine how all this might end up if All the Presidents Men has already been rented and the people at Clements’ video store try to persuade him to take home Tootsie instead? More on This Topic
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January 22, 2007 11:49 – Ball of Confusion
William Bernstein is one of the leaders of the New School of safe-withdrawal-rate (SWR) analysis. He is also one of those who fears saying what he knows in the clear and simple terms that would permit middle-class investors to make effective use of our SWR findings of recent years.
Bernstein was quoted in Jonathan Clements’ “Getting Going” column in the Wall Street Journal on Wednesday, January 17, 2007. Here are the words from that column that quote Bernstein’s views:
“Two percent is bulletproof, 3% is probably safe, 4% is pushing it, and, at 5%, you’re eating Alpo in your old age…. If you take out 5% and you live into your 90s, there’s a 50% chance you will run out of money.”
It’s hard to imagine how a larger number of misleading observations could be packed into 50 words. There are portions of truth-telling in all of those words, when they are viewed from just the right perspective. There is so much off about them, however, that it is hard to imagine that too many of those who haven’t studied SWRs in depth would be able to come to a reasonable understanding of the realities of stock investing today by reading them.
It’s not that there are bits of confusion mixed in to a ball of helpful investing advice. Bernstein has constructed a Ball of Confusion that does as much to mislead us as it does to steer us in the right direction, and then added enough flecks of genuine insight to make the dangerous mix appear insightful in an overall sense. There is insight there. But the insight is countered by the word games to such an extent that most readers are no doubt left more confused about what the historical data really says than they were before they read the comments.
A 2 percent withdrawal is not “bulletproof.” There is a caveat in every SWR study that highlights the reality that the historical data provides only a limited number of data points. The SWR is the withdrawal rate that works in the event that we see the worst returns sequence found in the historical record. If something worse turns up, all bets are off. There is no such thing as a bulletproof withdrawal rate.
Truth be told, a 2 percent withdrawal may well fail for those retiring with high-stock allocations even if we do not see in the future a returns sequence worse than the worst that we have seen in the past. There’s an assumption in SWR studies that the investor will never sell a share of stock no matter how big the losses are that he is required to endure. That is a highly dubious assumption.
In the past, most middle-class investors have increased their stock allocations in wild bulls and decreased their stock allocations in wild bears. If that rule holds in the future, it is entirely possible that there will be retirees who have enough assets to need to take only a 2 percent withdrawal who will see their retirements fail all the same.
Bernstein says that 3% is “probably safe.” He says nothing about what stock allocation he is presuming when making this statement. The convention in SWR studies is to look at what happens to portfolios with a high stock allocation, perhaps 75 percent or 80 percent. For such portfolios, a 3% withdrawal is indeed safe at today’s valuations. So it initially appears that Bernstein is not engaging in word games with this claim. His later comments, however, show that he cannot have in mind high-stock-allocations (the later comments are false if they are made in reference to high-stock allocations).
So the 3% claim only adds to our confusion as to what the historical data really says. A 3 percent withdrawal is super-safe (safer than what is required to qualify as safe as that term is defined in the SWR literature) if it is applied to portfolios with low-stock allocations. If Bernstein is using one stock allocation for his 3% comment and a different stock allocation for his other comments, then it is hard not to be drawn to a conclusion that he is deliberately seeking to confuse us about what the historical data reveals about what stock allocation is safe today.
We are told next that 4% is “pushing it.” The historical data shows that a retirement beginning today that includes a high stock allocation has about a 50 percent chance of surviving 30 years. Is a retirement plan with a 50 percent chance of survival “pushing it?” Some might use that phrase to describe such a plan. It’s more than a little bit glib to put things that way, though, given the dangers we are talking about here and the suffering that those dangers are likely to entail for millions. Those seeking solely to edify us as to the risks of high-stock allocations at today’s prices would use a word or phrase better communicating the alarm that should be felt by any retiree employing such a plan. A 4-percent-withdrawal (from a high-stock-allocation) plan is properly described as “a high-risk plan.”
Could it be that Bernstein has in mind stock allocations of a good bit less than 80 percent? That’s possible. But, then, why doesn’t he say that? Why doesn’t he let people know that, if they want to take a 4 percent withdrawal, they will need to go with lower stock allocations than the allocations that the conventional methodology studies identify as safe? Why the reluctance to letting his readers know the practical information that they are seeking when they turn to him for investing advice?
And why didn’t Clements challenge Bernstein on the Ball of Confusion he shared with him rather than quoting it in his column without negative comment?
“At 5%, you’re eating Alpo in your old age,” according to Bernstein. Is there not a suggestion here that those who suffer busted retirements because they used “the 4 percent rule” urged in the conventional-methodology SWR studies will not be eating Alpo because their retirements failed?
A failed retirement is a failed retirement. It makes no difference whether the retirement failed as the result of taking a 4 percent withdrawal or as the result of taking a 5 percent withdrawal. Both withdrawals are a good bit higher than the withdrawal identified as safe in analytically valid SWR studies. Why doesn’t Bernstein point out that those following the 4 percent rule who suffer failed retirements as the consequence of their reliance on the demonstrably false claims put forward in the conventional studies will also be eating dog food?
Finally, Bernstein says that “if you take out 5% and you live into your 90s, there’s a 50 percent chance you will run out of money.” It is not possible to make sense of this statement without knowing what stock allocation Bernstein presumes in making it.
Even at the time of greatest overvaluation in stock prices that we have ever experienced, it was possible to put together a retirement plan with a SWR of 5.8 percent by switching to 100 percent TIPS. So it is not true that all retirement plans calling for a 5 percent withdrawal are likely to fail. And there are of course many today who face much higher odds than 50 percent of experiencing busted retirements because they retired with high stock allocations at times of high valuations.
The value of looking at the historical data to assess the safety of your retirement plan is that the historical data provides you an objective grounding that helps you see through the dangerous subjective gibberish that causes investors such pain when stock prices have traveled to the la-la land where they reside today. Bernstein has taken a tool that is valuable because it provides objective insights and turned it into a tool spouting subjective nonsense by playing word games in just about every description he puts forward of what the historical data says about SWRs.
Long-term buy-and-hold investor, beware! Even those warning of the dangers of the conventional SWR studies and advocating the use of New School studies do not always possess the courage to pass along to you the information you most need to know about in words that are straight and plain and simple and true.
Shame on you, Bill Bernstein! And on you too, Jonathan Clements! Get back to where you once belonged! Don’t let us down! More on This Topic
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January 23, 2007 11:49 – The Investing Establishment
I received an e-mail yesterday from a community member named Stuart. Stuart says: “I must say your website is so enjoyable that it is keeping me from my research as I am so excited that I have found such a valuable resource.” Stuart’s primary interest is in the material at this site that discusses our findings from The Great Safe Withdrawal Rate (SWR) Debate. In reference to the “controversy” that follows me at every place at which I share our findings with others, he adds: “It only takes one person to be right to prove all the others wrong, and that is why rocking the boat is not accepted at first and then it becomes obvious to everyone later on!”
That says it well.
I don’t see it as bragging to report to you what Stuart says about the investing insights he discovered at our site. I started the ball rolling re The Great Debate. But I have pointed out many times that our breakthrough findings have been informed by posts put forward by thousands of members of the various Retire Early boards. I am the leader of the community. But I have my strong and weak points like everyone else. I could not have produced by myself the work product that we have generated together. This has been very much a community effort.
So when I say that we have done things that no investing expert has done, I’m not just saying “I’m great!” I’m saying “You’re great!” too. I’m saying “We’re great!”
It’s important that we say that.
There are lots of middle-class investors who do not know about our findings. It’s our job to get the word out to them. If we are not willing to say in plain and clear words that this community is a whole big bunch smarter than most investing experts, we cannot do the job that we need to do.
Lots of people have put their trust in the experts. We have discovered in recent years that the experts have gotten a lot of terribly important stuff terribly wrong. If we want to protect our fellow investors from the poor advice being dished out carelessly by a good number of today’s big names in the investing field, we are going to have to take steps to overcome any resistance we feel to tooting our own horn.
The last two blog entries discuss the January 17, 2007, “Getting Going” column by Jonathan Clements, published in the Wall Street Journal. The column reports as if it were news the findings of the New School SWR researchers that the conventional methodology SWR studies get the number wildly wrong because of their failure to include adjustments for changes in valuation levels.
Do you want to know when I figured that one out? It was in early 1996, nearly 11 years ago!
Do I possess some sort of investing genius that permitted me to figure that one out 11 years before a well-respected reporter for The Wall Street Journal figured it out?
Uh, no.
Here’s what I did. I borrowed a copy of John Bogle’s book Common Sense on Mutual Funds from the library. Bogle explains in the book why changes in valuations must always affect long-term returns. Knowing that valuations always affect long-term returns, I of course also understood that changes in valuations must affect SWRs. How could they not? So I knew not to put my confidence in the findings of the absurd conventional methodology studies.
What genius!
The problem with most of today’s experts is not that they lack smarts. The problem is that they lack independence or that they lack courage or that they lack curiosity.
Jonathan Clements is capable of figuring out what I figured out about SWRs in 1996. He doesn’t want to figure it out. Figuring it out and reporting to his readers what he figured out would put him up for some of the static that I have had directed at me in recent years because of my willingness to report the obvious and important fact that the conventional study numbers are from bonkersville and that we should be getting the word out to retirees to save them from suffering busted retirements in days to come.
Take a look at what Clements spends the column space he was granted in the Wall Street Journal talking about. He talks about an idea he has that retirement should be broken into two stages at which different withdrawal strategies could be applied. That’s fine. But where is the discussion of the more obvious news peg contained in Clements’ discovery of the errors of the conventional methodology studies?
Nowhere does Clements warn retirees who have put together plans in accord with the demonstrably false claims of the conventional studies that they had better get about the business of lowering their stock allocations before prices drop. Nowhere does he apologize for linking to conventional studies in earlier columns and thereby putting hundreds of thousands of retirements at risk of going bust in the event that stocks perform in the future in ways at all similar to how they have always performed in the past. Nowhere does he express amazement that the SWR for stocks could drop so low (the SWR for stocks was 1.6 percent at the top of the bubble, a time when the SWR for an all-TIPS portfolio was 5.85 percent) at times of high valuations. Nowhere does he note the obvious showing that the Efficient Market Theory cannot be right if the risk premium for stocks has become a negative number. If stock investors were rational, they would insist on obtaining some reward for taking on the risks of owning stocks.
Clements either lacks curiosity or courage or independence. He’s smart enough to write about investing for The Wall Street Journal. But there is a serious lacking here.
I have come to believe that people like Clements (I am using him as an example, he is certainly not the only one for whom what I am saying here is so) is part of an “Investing Establishment” that is not yet prepared to acknowledge obvious and terrible errors that it has made in telling middle-class investors how to invest successfully for the long run. The Investing Establishment dropped the ball. And, for many in the Investing Establishment, the three hardest words to pronounce in the English language are the three one-sylable words “I” and “Was” and “Wrong.”
My fan club often makes much of my lack of credentials to write about investing. I don’t have a degree in investing. I don’t manage a huge fund. I don’t pal around with people like Bernstein and Clements.
I think it would be fair to say at this point that I possess credentials that people like Bernstein and Clements lack. I possess the humility to acknowledge that there are things that I do not know. I possess the curiosity to ask people like you to help me learn what I do not know. And I possess the courage to report what we learn together to others with an interest in learning about the realities of long-term investing, regardless of what brickbats are likely to be thrown in my direction as a result of my pointing out the errors of the big shots.
There are many things that Clements knows about investing that I do not. There are many things that Bernstein knows about investing that I do not. These guys possess credentials to write about investing that I do not possess.
I am compelled to say after five years of watching the big shots let middle-class investors down again and again and again that I (and you, fellow community member!) possess credentials that those in The Investing Establishment do not.
Here’s my challenge to The Investing Establishment — I’ll put the work product of this community up against the work product of the Big Shots any day. The evidence is strong today that we got it right, for the most part. The evidence is strong that they got it wrong, for the most part. The Investing Establishment has dropped the ball. The Financial Freedom Community has picked it up.
Let’s run hard! Let’s not look back! Let’s not commit a fumble! More on This Topic
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January 24, 2007 12:02 – Sugar and Water Inside!
For me, saving has been an all-or-nothing proposition. Prior to discovering the Retire Early idea, I had zero savings (at age 35). After discovering it, I think it would be fair to say that I became an “intense” saver. At the high point, I was saving 80 percent of post-tax income.
There is little that anyone could have said to me in the old days that would have persuaded me to save more. The problem wasn’t that I hadn’t heard the arguments for saving, or that I didn’t understand them. It was that I didn’t care.
Most pro-saving arguments are presented in terms that make sense to Thinking types. Thinkers love to look at charts showing how investment returns compound over time. Feelers do not. Pull out a calculator, and most of the Feeling types leave the room. Or, if they worry that walking out would hurt the Thinkers’ feelings, they patiently endure the lecture until they have a chance to get back to a subject that holds their interest. That is, a subject relating to humans and their personalities.
What the Retire Early idea did for me was put a human face on the concept of saving. Before, the purpose of saving was to make money, to be secure, or to be able to join in discussions of how various stocks are doing. Boring stuff.
But achieving financial independence was not about money. It was about changing the type of work I did. Money was just a tool, and Feeling types have no objection to picking up tools when they see a clear purpose for doing so. In fact, the goal in mind serves to humanize the tool used to achieve it. Feelers play guitars not because they enjoy the feel of wood and nylon string, but because they like how the instrument can be used to express emotions.
All of a a sudden, saving was not a Money issue for me. It was a “Spending more time with my family” issue. Or a “Do work where you spend time helping people solve problems” issue. What was once boring was now compelling. Every budget category reduced was another song composed.
Once I had a savings goal that made sense to me, it was spending that became boring. Spending was what was keeping me from having more dealings with people. Who needed it?
Marketers realize how many people are looking for greater human interaction in today’s world. When they sell soda, they don’t put on the package “Sugar and water inside!” They offer the experience of being part of the new generation, or of teaching the world to sing.
But personal finance texts sell the sugar and water aspects of saving. “Save this amount today, and it will produce this other amount over time,” they claim. For many of us, it goes in one ear and out the other. You are more likely to teach the world to sing by saving money than by buying a Coke, but the Feelers among us rarely hear that message.
Acquiring motivation is the first step to achieving any money goal. And different types of people are motivated by different things. I believe that a focus in most personal finance literature on quantifiable goals turns off a good number of the people who most need help. It is important to quantify things at some point. But motivation must come first if the message is to hit home.
Some would argue that Feeling types should be motivated to save by the need to provide security for their families. Thoughts along those lines probably kick in at later ages. But many Feeling types in their 20s and 30s have no reason to save that makes sense to them if they have not heard of the Retire Early idea.
But tell them about the chance to spend more time with their families, or to do charitable work, or to pursue cultural interests, and watch out! More on This Topic
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January 29, 2007 07:42 – Investing Experts Are Politicians
I’ve added an article to the “Investing for Humans” section of the site entitled Investing Experts Are Politicians.
Juicy Excerpt: For a good number of years, I earned my living as a reporter covering Capitol Hill. My friends viewed it as a glamourous job, but it became boring to me. After you’ve done it for a bit, it gets to be the same thing over and over again.
Part of the appeal of making a shift to writing about personal finance was that it provided an escape from the aspects of politics that had become annoying. I had grown tired of all the gobbledygook and trickery used to avoid accountability. It turns out that the joke was on me re that one. Many of today’s most popular investing experts are politicians at heart!
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December 2006 << >> February 2007