Valuation-Informed Indexing #80 — We Have Forgotten the Purpose of Investment Research

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by Rob Bennett

The purpose of investment research is to help people become successful investors.

That’s as basic as it gets. It shouldn’t be a controversial statement.

But as of today it is. That’s a problem for all of us.

I am the person who discovered the analytical errors in the Old School safe withdrawal rate studies. I put a post to a Motley Fool discussion board on the morning of May 13, 2002, pointing out these errors. Many of my fellow community members were excited to participate in the learning experience that followed. A good number of Buy-and-Holders were not even a tiny bit excited. They angrily asserted that the studies were correct without putting forward any reasons for believing this to be the case.

That game has come to an end in recent years. The error in the studies is that they fail to include an adjustment for the valuations level that applies on the day the retirement begins. The safe withdrawal rate is not a stable number (the old studies assert that it is always 4 percent) but a number that varies with changes in valuation levels. Numerous experts have examined the studies and not one has found a valuations adjustment. So the question of whether the studies are in error is no longer in dispute.

I was happy to see the financial advisor who put forward the first of the Old School SWR studies — William Bengen, a California planner — recently acknowledge the error in the studies. I would like to see the studies corrected.

Millions of middle-class people have relied on advice rooted in these studies to plan their retirements and will in all likelihood be experiencing one of the worst life setbacks imaginable in coming years. The millions of failed retirements we will be seeing as a result of the errors made in these studies will no doubt be one of the worst social crises our nation has had to cope with in its first 235 years of existence. So I obviously would like to get the word out while there is still time for some of the people hurt by the studies to save their retirements.

Unfortunately, Bengen has not corrected his study and does not today intend to correct it.

Why? He offers no explanation.

The closest he comes to doing so is to put forward a suggestion that some of the retirements might survive. This is indeed the case. The New School studies (studies that have been done in the ten years since the errors in the Old School studies were discovered and which include valuation adjustments) show that there is a 30 percent chance that those who constructed retirements that began at the top of the bubble will not suffer failed retirements.

Bengen is right that the retirements may survive. He is wrong that the studies do not need to be corrected. A retirement that has a 30 percent chance of working out is not safe. It is insanely dangerous. Bengen’s study said that those retirements are safe and they are not.

There is of course a reason why Bengen hesitates to correct his study and why a number of generally good and smart people who work in this field have thus far failed to insist that Bengen and the others who have published such studies quickly get about the business of correcting them.

The Old School studies are rooted in the Buy-and-Hold Model for understanding how stock investing works, which in turn is rooted in University of Chicago Economics Professor Eugene Fama’s Efficient Market Concept. The fact that the retirement studies rooted in that model got the numbers wildly wrong and thereby will in all likelihood cause millions of failed retirements  shows the dangers of the Buy-and-Hold Model.

An entire industry has been built up to promote Buy-and-Hold. Thousands of books have been written. Hundreds of calculators have been developed. Millions in marketing dollars have been directed to the promotion of this model. Many people in the field hate to think about how big a job we have in front of us once we openly acknowledge that the model has been discredited by 30 years of academic research.

Still, the purpose of investment research is to help people become successful investors. That means that we must correct retirement studies that get the numbers wildly wrong. Studies that get the numbers wildly wrong do not serve the purpose for which investment research is conducted. They undermine that purpose. As millions of middle-class people suffer failed retirements, more and more investors will lose confidence not only in the investment research that has long been discredited but in all investment research.

We need to get these retirement studies corrected. There shouldn’t be one responsible person opposed to the idea. Serious people do not permit retirement studies that get the numbers wildly wrong to remain uncorrected for ten years after those errors become public knowledge.

The purpose of investment research is to help people become successful investors. We need to get back to where we once belonged and begin working together to see that the investment research that is done in the future is done to achieve constructive and positive and life-affirming purposes.

Rob Bennett has identified the 23 most common and most costly investing mistakes. His bio is here. 

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