The history of stock investment leans toward rationality.

I posted to the Motley Fool discussion board on May 13, 2002 at 9:00 AM. It was based on the Nobel Prize-winning work of Robert Shiller (who had not yet received a Nobel Prize at the time). Given that valuation affects long-term returns, it is logically impossible for the safe withdrawal rate to always be the same number (I had a colleague on that board who insisted it was always 4%).

Many people liked the post. They thanked me for starting one of the most useful discussions in the history of the forum.

The bigger numbers didn’t like it one bit. I ended up getting banned from the forum for pointing out that error, and from many other investment sites over the years. I was right. Enough people have told me I’m right to believe that’s true. But the majority of investors don’t want to hear what’s right today. Most want to hear from buyers and holders that stocks are always an equally attractive investment class and that there is no need to look at actual safe withdrawal rates or valuation levels to determine the true value of a stock investment. specific point in time.

This is a disappointing reality. This is a very disappointing reality. We would all be better off if we were allowed to talk openly about the far-reaching implications of Shiller’s remarkable work. If we all knew how to lower our stock allocation a little when prices start to get dangerously high, prices would never get too dangerously high. We can curb irrational excesses before they get out of control, causing price crashes, economic collapse, and increased political friction. Learning something new about stock investing can help us live a better life, a richer, richer, and freer life. But of course, no magic happens until you integrate your research findings into your understanding of how to invest in stocks. The Schiller Revolution was therefore a revolution hitherto rejected.

That said, I believe we are on the right track.

The arc of history bends toward rationality.

Martin Luther King once argued that the ark of history is bent toward justice. It is not difficult to imagine that there were times when he had to reassure himself that it was justified to continue the battle he was fighting. I think the arc of history in the realm of personal finance bends toward rationality.

It is not reasonable to calculate the Safe Withdrawal Rate incorrectly. The discussion board I was so concerned about was focused on the topic of early retirement. Some people retired in their early 60s, 50s, and in extreme cases (believe it or not) in their 40s. My recollection is that the guy who insisted that the safe withdrawal rate was always 4% resigned from his job at age 41 (he was a chemical engineer). Before he could take that step, he needed to know whether he had accumulated enough assets. I never want to take it back. You can’t go back to your employer in five years and say: I did it again! Can I get my six-figure salary back?”

The 4% figure is not a safe withdrawal rate. This may be appropriately referred to as the historical survival withdrawal rate. The worst retirement date in American history was the day before the 1929 crash. Retirement, which requires 4% withdrawals starting on that date, will leave you with $1 left after 30 years (a person who retires at age 65 is counted as age 95). That’s why those who promote the ‘4% rule’ claim that the withdrawal rate is ‘safe’.

What they’re missing is that the series of returns we saw from 1929 to 1959 was a bit lucky. In the history of U.S. markets, a 4% withdrawal retirement would have failed in half of the return sequences we’ve seen. Retirement with only a 50% chance of working out is not safe, if anyone uses that word rationally. It’s very dangerous. Such retirements actually survived, but not because they were safe.

Learn how stock investing works

Here are some things we don’t know about stock investing today. Things we still have to learn. This is the big picture. That’s reality.

Guess what? We are in the process of learning them. Considering Shiller’s work has been available to us for 43 years, it’s truly disappointing that we haven’t moved further along the learning curve. But I’m really glad that we’re moving in the right direction. Slow and steady is for sure. But there is plenty of human history to show that slow and steady actually wins the race.

There was a guy who posted under the name “EarnaBuck” and he was always on my side. It’s been a few years since I was kicked off the Motley Fool site. EarnaBuck was not a fan of Valuation-Informed Indexing. He said he couldn’t support my views on stock investing. But he urged me to make my case known in the community I was posting to at the time (the “Vanguard Diehards” board on Morningstar.com, another site I had no longer been able to participate in over time). EarnaBuck was there in the early days of the Motley Fool debate and said he thought I was crazy, but over time he realized I was right. Safe withdrawal rate.

Learning is possible!

Even in the investment advice field!

I love learning! My buy-and-hold friends always say there is no such thing as a free lunch, and I can’t help but point out that learning is a free lunch. One day you don’t know something and your life is a mixture of sadness and joy, and then the next day something clicks and suddenly the ratio of joy and sadness is a little higher. Without having to pay a penny for changes! What a great deal!

The safe withdrawal rate is a number that varies depending on the valuation level applied on the day retirement begins. I still say it. I am still right. When the day comes that I can speak freely wherever I choose, the arc of history will bend in the direction of more rationality in our understanding of how stock investing works.

Rob’s bio is here.