Have We Been Sold A Bunch Of Lies About Money?

Here lately I find myself often reflecting on the current status of our economy, and wondering when and how things will shake out.  My 401(k) has been demolished.  Family member’s 401(k)s have been demolished, even those in target retirement funds that should have been comprised of more conservative options based on their upcoming target retirement date.

The value of our home has decreased, as it has for our neighbors, and for most around the country.  After countless scandals and bailouts, banks are no longer the trusted institutions they once were.  Inflationary fears drive investors to the market in an effort to stay ahead of the curve, but are those fears oversold.  Can we beat inflation (which is really currency deflation) by refusing to inflate our lifestyles and living frugally?  And so I wonder, has everything we’ve been taught to believe about finances just a big lie?

Markets Always Go Up, Given Enough Time

My grandfather is a product of the Depression Era.  He lived the ultimate market meltdown, and to this day believes investing in the market is only marginally better than gambling.  After all, most of us pick stocks, or a basket of stocks, from companies we know little about.  We know nothing of their day-to-day operations, their leadership team, etc.  Warren Buffet has made a mint buying what he knows, but what about the rest of us.

Last week I received a revised and updated copy of my all-time favorite personal finance book, Your Money or Your Life.  The timing could not have been better.  While much of the information is the same, co-author Vicki Robin has gone to great lengths to provide updated statistics, relevant figures for today’s market conditions, and updated stories throughout the book.  I am thoroughly enjoying reading the book through again, with more of an open mind than I did the first couple times.

The first time I read through Your Money or Your Life, and hit the section on savings as working capital, I thought it was a preposterous idea to invest in things like U.S. Treasure Bonds and CDs. After all, I was young, and had been taught since I was old enough to spell “stock” that those were the path to building great wealth.  Maybe; maybe not.

When the authors of Your Money or Your Life “retired” the yield on 30-year U.S. Treasury Bonds were hovering around 6%. Today they hover around 3%, but are trending up.  Still, that is the difference in $1,250 per month and $2,500 per month in interest on a $500,000 portfolio of bonds.  That’s pretty significant, and proof that any investment has environmental risks.  If I had half a million dollars, and rates were back up to 6%, I could live on $2,500 a month assuming I had no debt (including a mortgage).  It’s getting that $500,000 saved that is the hard part.

So, by diligently socking away money in my 401(k) and Roth IRA, only to watch most of my contributions melt away in a matter of months, have I been going about this all wrong?  Instead, should we be simply putting money in high-yield savings accounts, bonds, and CDs, and prepare to live off the interest?

I suppose that answer depends on a variety of factors, including our risk tolerance, age, and other individual situations.  There are a lot of people sitting on some huge losses, and if we sold now we would realize them, and miss out on a market rebound.  I can’t help but wonder how many will get out when and if that rebound occurs and they are made whole again.  That type of selling will probably work to stymie a future bull market.

After watching these wild market swings I’m starting to wonder if I really have the stomach for it.  Maybe I’ll join those described in Your Money or Your Life, and my grandfather, and devise a very simple plan for financial independence.

Comments

  1. I really enjoyed this post. I think that every time there is a large swing in the market some people start insisting that “everything is different”.

    In the late 90s some insisted that technology made everything different and therefore one could expect 18-20% annual returns.

    A few years ago, people started believing that real estate gains made everything different and one could simply buy real estate, let it appreciate, and refinance it for huge profits.

    Neither of those scenarios held true for very long. I believe that the idea that everything is different now and buying and holding stocks for the long term no longer works will soon prove to be as wise a philosophy as the two examples above. In the meantime I am continuing to sock money away in my low cost funds and keeping my portfolio properly balanced.

  2. Great, thought-provoking article. Ultimately, I think that you are right about situation and risk tolerance. We are using high-yield cash options (CDs, savings, etc.) as well as continuing to contribute to our Roth IRA (which hasn’t lost as much as many have). I think that, over time, our conservative portfolio will allow us to live the way we want to in retirement.

  3. Good article and great perspective FD..

    If I’m reading correctly, I would have to agree with RDS. Stocks are a good long-term investment, and are probably very cheap to buy in currently. Perhaps when I’m on the other end of the retirement spectrum, I’ll want to tend towards more conservative investments, but for now, I feel like I’m buying in cheap.

    I once heard that more millionaires were made during the depression than at any other time. I think many people will be able to prosper financially even with a down market if they are patient and persevere.

  4. While stocks are a good long-term investment, theoretically, it depends WHEN you buy and WHEN you sell.
    If you buy high then are forced to sell low many years later, it’s not a good long-term investment then.

  5. I know how you feel, I think we’re all a little queazy right now. The one thing that has kept me going is reading up on the past.

    This kind of thing has happened before and will happen again. And still, here we are and the market still goes up over long periods of time.

  6. @RDS @ Smart Financial Values, you state “Neither of those scenarios held true for very long. [re: Tech stocks and increasing home values]”
    I would have to disagree. Those trends held long enough for many many people to get quite wealthy from them. It all depends on what financial situation you are in when those fortuitous turns come about and whether you have the capacity to take advantage of them or not. In the tech sector, Microsoft alone has made almost 10000 millionaires and a small number of billionaires. There are countless more stories like that. With home value appreciation, there are plenty of people who made small fortunes from that. To say that it is a bad idea to get in because “it may change” is disregarding what the stock market is for.

    @FrugalDad, yes the stock market is a gamble. Albeit not the same as dropping $50K at a craps table, but still a gamble. You have to know when to walk away or when to stay at the table until your luck changes. My uncle & aunt lost almost $80K in their 401K when the bubble burst in 2000-2001. They may that back and much more when the stock market soared to over 13,000 points over the next 5 years. I imagine they moved it around a bit with this next turn, although they are not expecting to retire for another 5 to 10 years anyway. They may just let the market readjust and wait it out.

    From what I understand about CDs and bonds is that you don’t get the interest until you cash in the CD/bond. So your money is tied up for however many years the bond is for, right? I would recommend bonds for younger investors (like yourself) but don’t expect that money back for some time.

    Putting your money in a high-yield savings account is also a gamble. As the previous 8 months have shown us, banks can fold like any other badly-run business. Sure, you can get your money from FDIC if the bank folds but you also don’t get interest built up from the time the bank folds till the time you get your money back. And of course, your money won’t be worth as much anyway due to the inflation that may have occurred by all those banks folding (as happened this past summer/fall).

    I’m not saying that investing is bad, but keep in perspective that it is ALL a gamble. You are gambling that your investment avenue will pay out more in the long run than you put in. You are also gambling that it will outperform inflation. If the odds work out in your favor, you get to retire and live comfortably. If not, then you get to continue working for a long time.

  7. I think it’s also important to note that many companies match your 401k contributions (up to a certain percentage). That is a 100% return on your money.

    Also, the market mantra is buy low, sell high. If you feel your contributions are ‘melting away’, just think of dollar cost averaging. If you hold out, just think of the gains you’d be missing out on.

  8. There’s an investment strategy designed to protect people from severe swings in the market while still maximizing a person’s chances of lucking out with one of those unpredictable runaway successes like Google or Microsoft. However it’s not a maximum-growth strategy designed to create as much wealth as possible during good times, and I can’t see any way to “securitize” it or package it Madoff-style or Fannie Mae style, so odds are it will never catch on.

    The strategy is the “barbell” strategy proposed by Nassim Nicholas Taleb in his book “The Black Swan”, which is about statistical improbability and unpredictable events. From his years as a mathematician and stock trader, Mr. Taleb developed what he called the “barbell” strategy. The idea is to invest at the extreme ends of the risk spectrum: lots of assets in ultra-secure but low-return investments that don’t get hit when an unexpected, unpredictable thing happens to investments that people think are medium risk. The rest is speculative money that gets invested in start-ups, exploration, art, or any other activity for which there’s no way to really calculate how big the success will be if it occurs, and no way to predict exactly where the lightning will strike. Since these high-risk speculations are, well, high-risk the investor expects most of the money to be lost or to break even at best, however in the event of a success the return on the investment is phenomenal. So there’s disproportionate investment in the low end of the risk spectrum, and the high end of the risk spectrum, and little or nothing in the middle. According to Taleb, the middle is where the weird stuff happens because people get complacent and think they’re safe.

    The barbell strategy is the exact OPPOSITE of what is encouraged by stock traders and mutual fund managers, who strive to balance the risk in their portfolios around some average level, creating a bell curve. That guarantees an average rate of return in the best of times when the returns are fairly predictable, and in the worst of times when a person can’t predict diddly… well, you see what’s happening.

    I’ve been using a variation of the barbell strategy for years and am only down about 10% including my 401(k) and house investment. While I didn’t make the kind of returns on my investments some of my friends did, I’m not crying in my soup right now either, and I’m not having a “downturn” as such because business is very, very good.

    “The Black Swan” is very easy reading, there’s not a lot of fancy math, and anyone can understand it. I recommend it to everyone who is freaked out because the market is doing what markets do. Your local library ought to have a copy, and if not, this is definitely a book that is worth owning and reading several times.

  9. @DavidK: The 30-year U.S. Treasury Bonds recommended in Your Money or Your Life pay interest twice a year, and the face value is returned when the bond matures. The idea is that you accumulate enough of this “working capital” to generate enough interest to cover your basic needs. At that point you are free from needing to work for money, theoretically.

  10. Your investment portfolio should reflect your age and retirement picture. Right now, and for the next couple of years, if you need the money for retirement soon then you shouldn’t be in any stocks at all.

    I have 30 years before I will need that money, and in any 20 eyar period since we have had a stock market, no asset class has out performed stocks. I will stick with them. . .

  11. The first book I ever read on personal finance, at least 15 years ago. Helped me at the time to live happily in the situation I was in (living at poverty level). I just ignored the part about buying into the market since there was no way I could do that. I didn’t realize they had updated the book, I will have to check out the new one. Thanks for telling us!

  12. It’s been scary to watch how things have played out over the last year. The best that I have come away with is this.. Not to put all my eggs in the same basket. Our number #1 priority now is to try to reduce living expenses, long-term (perennial crops, food, utility sources such as wind/solar, disposables, etc with long term planning in mind) #2 eliminate debt #3 then plan out our investments. We’re definitely far from perfect, but I’ve watched too many friends around us living beyond their means in a home they thought they could “flip” and now are stuck with it. And they use their 401k as their ultimate plan for retirement. What a crushing feeling that must be to have your hopes dashed in just a matter of months.

    I’m thankful to have had to learn some tough lessons along the way and still be young enough to have time to correct some of my ways. Maybe the bright side of this is…people will start questioning their choices more, not just go along with something because everyone else is doing it. Our economy will be more stable if it weren’t built like a house of cards dependent on people making payments on debt.

  13. Well, it’s a triple whammy today, and few people will be unscatched because either 1) you lost $$$ in the stock market, and/or 2) in the value of your house, or 3) you lost your job last year, or will this year. I chose to invest my $$$ in high-yield CD’s because I didn’t understand the stock market, and while I’m capable of learning, that’s not how I wanted to spend my time. Of course a lot of my friends laughed at me, but none are laughing now. With CD’s you can elect to have the interest rolled back into the CD each month, or you can have it deposited into your checking or savings account, again monthly. However, my house has lost its value by about 40%. But I didn’t buy it as an investment. I bought it as a place to retire in, so paid it off, and w/the recent reduction in my property taxes, I’m able to make the monthly property tax payments from the interest earned from the CD’s. I went for the sure thing, and it paid off. Also, I don’t have the stomach for the ups and downs of the stock market, meaning my health is #1 to me, and it just would have affected my peace of mind too much. I do hope, however, that everyone who lost their $$ in the stock market, will see a turn-around in the future. (My father, who has a Masters in Bus. Admin. invested all his $ in treasury bonds, paid off his house early, and he’s done very, very well, financially). In fact, he retired when he was 45.

  14. I read YMOYL years ago when it came out and could never really grasp that investing in bonds was enough return to cover inflation. I always panic when the market turns south so have moved my IRA in and out of MM funds loosing lots of $$ had I not just parked the investment in a growth fund. In hindsight I should have just had the IRA in long term CDs and kept the principle. I have tried to show my son the advantage of Roth IRAs, investing over 20K for him in lieu of his wages. It is now down to 12k in an 500 index fund. But I plan on investing 5 more K for him since he has 40 more years until he is 61. It will be my gift towards his future well being.

  15. My father, a child of the Depression, raised me to save money, avoid the stock market like the plague and be aware of what I did spend. (He also wasn’t too trusting of savings institutions but I never did cotton to the idea of making my Sealy Posturpedic my banker). There were times when I was younger that I will admit to being a spendthrift – jewelry, cars, clothes or shoes didn’t much interest me, my weaknesses were good food, antiques and vintage Seabiscuit collectibles – but no matter how much I spent I always managed to also squirrel away on a regular basis. After buying and helping renovate an abandoned building in NYC 30 years ago with a group of people I own a double co-op in a very trendy neighborhood free and clear of any financial encumbrances; I have a six-figure savings account in ING which makes me a better return than anything currently out there, and even though my apartment is now worth maybe $850,000 rather than the $1,000,000 I could have gotten for it 2 years ago, I only paid $500 to buy it so it’s still all good. The few investments I do have – a 401(k) from a former job, IRA’s that I opened to try and save at tax time, etc. – have lost more than half their value, so I doubt I’ll be investing in either of those again anytime soon. Overall I’ve been unscathed by the economic turmoil, but I still read F.D. (along with a number of other “frugal” websites like Simple Dollar, Tip Hero, etc.) religiously, and manage to learn new things all the time. Because the reality is, no matter how “safe” I might be now, that could all change in a heartbeat depending on what happens in the future; I have years to go before I retire, so I might someday discover that my nice cushion is indeed full of nothing but hot air.

  16. The investing advice in YMYL is not perfect either. But I took the criticisms of the conventional wisdom put forward there seriously and have engaged in extensive research over the past seven years to uncover the flaws in the conventional advice. We have not been told “lies.” But we have indeed been given terrible investing advice from 90 percent of the “experts” over the past 30 years.

    The problem is that the conventional advice urges us to remain in stocks even at times of insanely high prices. We have historical data going back to 1870 and the most important message conveyed in the data is that stocks always provide bone-crushing losses to those who invest heavily in them at the sorts of prices that prevailed from 1995 through the first half of 2008. Yes, you need to invest in stocks. No, you do not want to invest more than 20 percent of your portfolio in stocks at those sorts of price levels. It’s gambling away your retirement money to do so. It’s irresponsible in the extreme.

    Adjust for price levels, and the risk of stocks is greatly diminished. Stocks ALWAYS provide terrible long-term returns when purchased at insane prices. Stocks ALWAYS provide great long-term returns when purchased at reasonable prices. Stocks are like anything else that can be bought or sold. Would you pay three times fair value for a car? If not, why should you be willing to pay three times fair value for stocks? It doesn’t make sense and repeating the phrase “timing doesn’t work” ten thousand times does not change that.

    I invite all interested in learning about some more sensible investing strategies to review the material at my site. I have worked this 10 hours per day six days per week for close to seven years now. There are three unique calculators at the site. There are over 50 podcasts (I record three new ones each week). There are scores of articles. There are hundreds of fine people in the Retire Early and Indexing discussion-board communities who have helped in this effort.

    We MUST get the word out re this. If people pull their money out of stocks (more are talking about it all the time), we are going to see another huge price drop. That is going to put our economy into a depression. All of this is 100 percent unnecessary. It is all the result of a MISTAKE. We really need to get about the work of getting some serious people involved taking some serious steps. There are many people who know about all of the things I am talking about but who are afraid to speak out because the human misery caused by the Passive Investing concept has been so horrible and it is considered “taboo” to note the errors in this failed approach. I have never seen anything like this!

    I am grateful for your article, Jason. People need to talk out about this stuff. You are doing your part to get a discussion started.

    Rob

  17. I think the falsehood we’ve let ourselves believe isn’t about money, but about whether (and how much) we really can predict the future based on the recent past. Money and investment are simply the area in which our mistake is becoming really obvious right now.

    That tendency to believe that the future will resemble the (recent) past is what causes people to believe that “everything has changed” because of a new technology or a new discovery. Sometimes there really *are* ground-breaking advances that change everything. And sometimes what we think is a ground-breaking advance is just a run of good luck.

    As good as our analytical skills might be, and as smart as we may be, when we make guesses about the future based on the past we’re limited by the sampling and the experiences we’ve had and the things that *have* affected us. The things that *can* affect us, but have not, are invisible to our experience so they don’t factor into our reasoning or decision making until it’s too late.

  18. The quote at the end of my comment on the principles of the farmer is not metaphorical.

    I don’t believe an economy can “run” sucessfully and sustainably for any length of time without adequate attention being paid to what is usually called “the real economy.” I’m referring to people working to produce goods and services like food, shelter, and clothing, to name a few. Government, corporations, and individuals have erred away from investing in our real economy–they invest in “cheap fun and bird’s eyes.” Yes, some people have lied. Every financial investment carries with it a certain amount of risk; so do non-financial investments. And…the past is not necessarily a good predictor of the future. If there are market corrections and erosions of trust, it may be because too many people have taken their eyes off of the ball, hoping someone else had their eye on it. I repeat: an economy cannot run successfully for any length of time without making, growing, and building things, developing the skills and ethics that go along with a problem-solving mindset and a system based on providing and exchanging value. How much of our agricultural and manufacturing base remains in this country? How many of our citizens can actually produce something of value? That is your measure of trust and security. The rest is fumes.

    “What are the principles of the Farmer?”

    “Good seed is more precious than pearls; fertile soil is more valuable than gold; that an experienced farmer can make greater riches by sowing than a moneylender by the interest earned on money.”

    Hazrat Inayat Khan

  19. I took a 40% hit om returns this year. Not fun! I’m only 41 and and do understand the long term perspective. I’m leaving 3/4 of my portfolio in the market as before the fall. I continue to invest because long term things will work out. I still believe investing now is “bargain central.” However, I would like the market to hit bottom soon. We’ll see.

  20. Yes… our government has been lying about the state of the economy of decades and covering it up with low interest rates… Allan Greenspan was a master lier.

    The dollar is going to collapse, so move your money out of dollar based assets before it does.

  21. Amazing. I never knew the government had such control over the FREE MARKEY ECONOMY in our country where INVESTORS put up THEIR OWN MONEY in the market. We should get the word out!

    Of course the fact that ALL ASSETS ARE BASED ON THE DOLLAR makes trying to move to another asset moot! That would be why it is called currency. We use it as an abbreviated way of exchanging goods and services and human beings have been doing this for millenia. The point of this article is to try and maximize our “currency sink” in our favor in time for our planned retirement (or some other goal). The debate between stocks, bonds and savings accounts rages on.

  22. To the poster at comment number 16, above:

    I went to listen to those podcasts you recorded. Far from being helpful for investing, they mostly seem to be a long drawn out reaction to your frustration at not being accepted on traditional finance boards. I’m not sure what your message is supposed to be, and if it’s any good or not, but it is sure being lost in your personal hurt and lashing out at those you feel offended you.

  23. This is a response to the comments put forward by Dave at Comment 22.

    The message, Dave, is that valuations affect long-term returns. This was not known at the time the time the Passive Investing model was developed. It is the Passive Investing model that caused all the problems we are living through today. If people know to lower their stock allocations when prices get out of hand, the market is self-regulating. People sell when prices get too high and the selling causes prices to return to reasonable levels again.

    There was some research done in the 1960s and 1970s indicating that the markets are efficient even in the short-term; that is, that extreme overvaluation is not possible, that the prices set by the market are always in the right neighborhood. Robert Shiller published the first research showing that this is not so in 1981 and there have been many follow-up studies since then. This mass of research discredits the Passive Investing model. It shows that just about everything we have been told about how stock investing works for the past 30 years is wrong.

    The problem is that the “experts” who have been giving the bad advice feel terrible about the mistakes they have made. They are suffering from something called “Cognitive Dissonance.” People suffering from Cognitive Dissonance are not capable of making sense of things. They are struggling with conflicts that cannot be resolved in their minds. They have lost their connection to rationality (not on all questions, only on the matter causing the Cognitive Dissonance). The people generally referred to as investing “experts” are today the last people you want to go to to learn what to do with your retirement money, but not because they are “liars” — the problem is that they made a mistake so big that they are not yet able to cope.

    I of course understand that this is an unbelievable story. What I can tell you is that you can verify it yourself by checking out the materials at the site or by reviewing the Post Archives of the discussions that we have been holding in the Retire Early and Indexing discussion-board communities for close to seven years now. As incredible as all this is, this is the best explanation that anyone has come up with for what has happened.

    Not all experts are suffering from Cognitive Dissonance. If you read Shiller’s “Irrational Exuberance,” you will see that there was nothing even a tiny bit surprising about this price crash. Shiller saw all this coming in 1996. It was all 100 percent inevitable. There are a good number of experts who have endorsed Shiller’s findings — Rob Arnott, Andrew Smithers, Cliff Asness, Ed Easterling, and many others.

    Arnott has said that we are on the threshold of a “revolution” in our understanding of how stock investing works. All the intellectual work that needs to be done has already been done. We “know” how stock investing really works. But we cannot talk about it! We cannot share what we know with others. If only 10 percent of us know the realities, can it really be said that “we” know the realities? If only 10 percent know, the 90 percent who do not still cause massive price crashes. We need to get the word out!

    That’s where the other matter that you refer to comes into play — the abusive posting. At every board at which I have explained these ideas, I have received a tremendous positive response from the vast majority of community members. At every board, I have also witnessed savagely abusive posting from a small but intense group that very, very much does not want people to know about the new findings. It certainly is true that I talk about this phenomenon on the podcasts. This phenomenon is the entire problem! Once we overcome the anger that some people feel about discussion of the things we have learned, we all get to move forward to where we all deep in our hearts really want to be.

    The people who post abusively suffer the same losses that all the rest of us suffer as a result of failing to move forward in our understanding. Talking about this stuff is a win/win/win with no possible downside. But we really must begin talking about it. We need a national debate on how stock investing works in the real world. We can usher in a golden age of middle-class stock investing by learning the realities. I think we all should be working together to make this happen as soon as humanly possible.

    Rob

  24. @Rob Bennett, thanks for letting us know that all those millions of people who have retired, are retiring right now and will retire comfortably on their 401Ks and IRAs are ALL DOING IT WRONG. Strange that so many people can be wrong yet it all works out so right in the end.

    It sounds like those who have “researched” whatever method for investing you speak of (which you haven’t named yet or even given a hint as to how it is done) are basing their facts on a model market, not the REAL MARKET. In the real world, external forces that are not market driven DO affect market prices. I personally wonder at what effect the news media’s “the sky is falling” mantra has on our stock market. Fly-by-night investors will move money in and out at will, so will extremely tenuous rich investors. At no point in school or even in research venues does the real market follow a model market as given by optimal conditions. We can only do the best with what we have — this isn’t engineering or mathematics, it is more a dance of statistical analysis along with anthropological and sociological influences.

  25. This is a response to DavidK, who posted Comment 24.

    I certainly am not in favor of the “The Sky Is Falling!’ stuff, Dave. My message is precisely the opposite. I am trying to combat that stuff.

    The cover story in the last issue of “Money” magazine discussed the question of whether all that we have been taught about investing for the past 30 years is wrong. That opening excited me a great deal as that is exactly the message that I have been pushing for a long time now. The fellow who wrote the article explained that the idea came up because he was giving the standard investing advice to some middle-class people and one guy stood up and asked “Is there a point at which things would get so bad that you would stop saying this same old stuff?”

    That’s a question that lots of people are asking today. The old model has failed us. If you don’t see that, I really don’t know what I can say to convince you. All you need to do is to open your eyes to all that is going on about you.

    The question is — What is the best thing to do when an investing model has failed?

    The article at “Money” attempted a patch-up job. The article argued that it turns out that stock investing is a lot more risky than we have long thought it to be. I think that is the worst idea that could possibly be advanced at this time.

    If people become persuaded that stocks are in reality far more risky than they thought, people are going to take their money out of stocks. We are going to see another huge price crash. The economy is going to go into a depression. There will likely be wars that will follow from that. Things are going to get very dark indeed.

    I am proposing a different course of action. I am not saying that stocks are not more risky than we thought. I am saying that stocks are a lot LESS risky than we thought. If you take valuations into account when setting your allocation, the odds are strong that you will never experience the sort of price crash we are living through today. That’s the risk, isn’t it? What people want to do is to avoid losing their retirement money, right? Why not tell them what they need to know to avoid such losses? If we tell people what they know today about valuations, we take away most of the risk of stock investing. What is the downside?

    There’s a calculator ay my web site called “The Stock-Return Predictor.” It reports what the most likely 10-year return is for stocks from various valuation levels assuming that stocks perform in the future somewhat as they always have in the past. It tells us that, at the valuation levels that applied in 2000, the most likely 10-year return was a negative number. Do you not see the benefit of knowing that in advance? Those who knew that in advance knew to lower their stock allocations before the price crash. How could that possibly be a bad thing?

    Those who knew to lower their stock allocations are not suffering from feelings of panic today. We are not saying “The Sky Is Falling!” because the sky is not falling for us. I am trying to get the word out about the research findings of the past 30 years so that everyone else will know the same things as those who have looked at this research already know. I think that getting the word out is the key to avoiding a general panic and a depression. Once people know the realities, they will gain the confidence needed to invest in stocks for the long term. No one can do this successfully without possessing confidence that they know the realities.

    It is impossible for those following the Passive approach to ever gain confidence in their choices. Passive investors do not change their stock allocations in response to price changes. Are you able to imagine any scenario in which that would be a sensible way to proceed? I am not. I do not think that the rational human mind is able to conceive of any scenario in which Passive Investing could work in the real world. We need to give it up and become true long-term investors.

    We do NOT want panic. We want to become better informed and thereby more confident. We need to launch a national debate in which we look at the flaws of the failed model and aim to replace the flawed elements of that model with something that works. I think we want the same things, Dave, although we obviously are coming at these questions from different places.

    Rob

  26. Ok, Rob, just a couple of points here to indulge your debating bone.

    1) The ONLY mention you have made of your “new way of investing” is to be more long-term investors. Yet a few sentences before that you state that those long term investors are valuating the stocks they invest in BEFORE they invest? Interesting since you can only value a stock based on prior and current market prices, what the company does to make money and what YOU THINK it will do in the future. There is no magical formula for this. This brings me to point #2.

    2) Investing in stocks IS A RISKY BUSINESS, I don’t care for anyone who says differently. Are you going to tell me that your magical “valuation calculator” told you to pull money out of Enron before it took the big plunge? As an investor, you are doing nothing more complicated than giving a company your money to do business with. They pay dividends to you if they are able to make a profit. On the other hand, if they fold, then your money is gone. Just like that. No valuation predictor can tell you if a company is doing well or doing badly. As Squeaky stated above, this consists of trying to predict the future based on the recent past — which will sometimes get you into loads of trouble. The only way to really value a company is to know what business they are in, what their business practices are and how innovative they are within that market. There are stacks and stacks of publications that try to do this without even visiting the damn company. Enron was really good at appearing to do all three all while circling the drain.

    3) As an additional to point #1, I can only take from your “advice” (which as Dave Parmesian stated just seems to be a lot of hand-waving with little actual substance and I agree) that we should invest a) wisely from the beginning, b) don’t buy high and sell low and c) leave the money alone once we put it into the stocks we’ve “valued with your magical valuation/return calculator”. (Which, by the way, I took a look at and without some sort of descriptive legend or at least a “how to” on the page somewhere, I cannot made heads or tails out of.) Basically, what I’ve gathered is that you state we need to be active with our investments rather than passive but without knowing the future, this is quite impossible to do.

  27. Thanks for your questions in Comment #26, Dave. I believe that you are helping us all to understand things better by putting forward some good points.

    Please scroll down the page where the Stock-Return Predictor resides for “how to” information on what it is and how to make use of it. The background is set forth below the calculator itself and in links provided at the bottom of the page.

    The strategy that I recommend is Valuation-Informed Indexing. You are right to point out that it is difficult to know what is going to happen with individual stocks. I don’t agree that it is impossible to develop informed takes re this, but I do agree that it takes a lot of time and research effort to pull off. I believe that only investors willing to devote a lot of time to the task should be picking individual stocks. Most of us should be investing in broad indexes.

    With indexes, it IS possible to know what is going to happen. Not with absolute precision. But it is entirely possible to develop in advance a very strong sense of how your stock investment is going to perform in the long term. Individual companies can rise to great heights or fall to great lows as the result of unpredictable events. That’s not so of broad indexes of stocks in developed economies. The U.S. economy has been sufficiently productive to finance average index returns of roughly 6.5 percent real per year for a long, long time now. The calculator assumes that that will continue to be the case (but those who believe otherwise are of course free to add a little something or subtract a little something from the numbers generated).

    If you accept that the average return on a going forward basis is going to be something in the neighborhood of 6.5 percent real, you are only one step away from being able to predict your long-term return effectively. The last step is to add an adjustment for the valuation level that applies on the day you make the stock purchase.

    The calculator uses a regression analysis of the historical stock-return data to “predict” returns (it is not “predicting” in a strict sense, it is really just reporting what returns will be in the event that stocks perform in the future somewhat as they always have in the past — it’s like a weather report) The calculator shows that, at times of extremely low stock prices, the most likely 10-year return is a positive 17 percent real per year. At times of extremely high prices, the most likely 10-year return is a negative 1 percent real per year.

    What allocation is right for the Passive Investor? There is no rational response to this question. A low stock allocation leaves a ton of money on the table at times of low valuations. A high stock allocation insures losses for a long time for a large percentage of your portfolio, obviously not a good thing. Successful Passive Investing is a logical impossibility. The only thing that makes sense is to CHANGE your allocation (to engage in long-term timing) in response to big price changes. This is what makes Valuation-Informed Indexing different from Passive Indexing, the conventional approach to indexing.

    I agree that there is always going to be some risk to stock investing. We cannot eliminate risk, but we can greatly reduce it by being willing to engage in long-term timing. The problem is that we all find emotional appeal in the idea of overinvesting in stocks at times of high prices. What we need is to hear a lot of experts encouraging us on a daily basis to be sure to lower our stock allocations before we destroy ourselves. What we got during the Passive Investing era is the opposite. Most “experts” were telling us NOT to time the market, they were saying that we should STICK with our high stock allocations despite the insane price levels. They were advising us to take on far more risk than we bargained for when we set our stock allocations at times of far more reasonable prices (when risk was far, far less).

    We cannot know the future entirely. That’s beyond us. But there is much that we can know. Passive Investing has caused us to make an effort NOT to know, it has blinded investors to the realities. I am urging a dramatic move in the opposite direction. I am saying that we should try to learn as much as we can about how to invest effectively rather than to put so much of our human energies into propping up the failed ideas of the past. Once we get past the idea that Passive Investing might work, we usher in a golden age of informed investing strategies that has been kept from us for a long time now because of our unwillingness to say what needs to be said about the flaws of the now dominant model.

    Say that you were trying to lose weight and that your problem was that you eat four pieces of chocolate cake every day. That’s equivalent to the investor who was going with a 70 percent stock allocation during the time when prices were at insanely dangerous levels. It helps the person trying to lose weight when experts point out the health dangers of being overweight and the benefits of a good diet and of exercise and so forth. What if the experts told us all that eating four pieces of chocolate cake is just fine and that eating and exercising well is “impossible.” That would set back our efforts to achieve our goals, no?

    I am saying that the “experts” in the investing field should be advising us to struggle against our worst emotional impulses, not to give in to them mindlessly. Instead of telling people to invest passively, we should be pointing out to them the dangers of doing so. Instead of telling people that timing doesn’t work, we should be telling them that the same data that shows that short-term timing has never worked also shows us that long-term timing has ALWAYS worked.

    We should be giving people the encouragement they need to follow long-term strategies. Passive Investing encourages people to overinvest in stocks at times of dangerous prices by telling people that it is okay or even a good idea not to adjust their stock allocations in response to big price changes. We need to begin telling people the precise opposite of what we have been telling them for 30 years now.

    Rob

  28. It’s times like these that con men and experts in self-promotion try to take advantage of people who are feeling the pain of a loss. Be careful. I recommend only making changes to your plan when the markets feel more or less “normal” and you are feeling comfortable. If you have ideas that you want to implement – fine – but see if your still feel that way in a couple of years. Procrastination is often the investor’s best friend at times like these.

  29. Slow and steady. Conservative.
    Old fashioned words but they have worked for me over the years. There’s only 5% of my portfolio in anything high risk, so my losses were very very minimum, and then, only on paper. I just figure that unless I sell that 5%, it will eventually return and prosper.

    In the meantime, I just take my piddly little interest payments and dividends on my CD’s, bonds, and safe investments, and plod along slowly to retirement. Nothing flashy, but solid.

    And about losing the value in my home? Not! It is a home – a roof over my head – it is the very same home as a year ago and serves the same utilitatian purpose. The $$ value does not matter as I do not intend to sell it, but rather to just keep it until I (hopefully) die in it after a nice long retirement. I still have the same use I had from it a year ago – so have not lost anything at all in the housing market. And as it’s paid for, that says it all.
    Some things, I think, are just in how you look at them.

  30. It does not have to be just savings account, I just checked my 401k which as dropped over 12000m and the money market account has earned 5 percent this year and almost 6 percent in the last year. every other fund is negative even on the 10 year average.

    It does make you wonder if long stocks are still going to be the best bet for long term growth.I am still going to ride it our for now though.

  31. he seems prone to calling the police on those who disagree with him!

    It is true that I have notified the police, Dave. Appropriately so, as crazy as it should be to say that in a discussion of an investing topic.

    There are two articles at the site that provide background helpful for those trying to come to terms with some of the extraordinary realities that have come to light during our first seven years of discussions.

    This one sets forth the text of an e-mail that I sent to my congressman that provides an overview of the history of the abusive posting problem:

    http://www.passionsaving.com/internet-harassment.html

    This one sets forth snippets from posts by over 101 members of the Retire Early and Indexing discussion-board communities expressing a desire that honest posting on valuation-related topics be permitted at our boards:

    http://www.passionsaving.com/investing-discussion-boards.html

    Do you have constructive suggestions to offer re how to deal with this situation, Dave? We have developed insights of great importance not only to investors but to all concerned about the fate of the U.S. economy (since the stock crash is one of the big reasons why consumers are cutting back on spending). We have had thousands of community members express a desire to learn about these ideas. And we have a relatively small number of abusive posters (perhaps 20 percent of most board communities) that is intensely opposed to the idea of permitting the discussions to go forward.

    Every board that I have posted to has rules in place protecting those who want to contribute constructively from those who engage in the sorts of tactics under discussion here. My view is that these rules should be enforced in discussions of the flaws of Passive Investing just as they are enforced in all other sorts of discussions. I view it as a bad sign for this investing model that some of its “defenders” resort to these tactics and that a much larger number tolerate them. If there were people employing these tactics in support of my investing beliefs, I would disassociate myself from them in every possible way.

    In any event, I do believe that police action and congressional action is appropriate. There have been death threats made against me and my family members (and other community members). The phrase “death threats” and the phrase “investing strategy” should never appear together in the same paragraph. There is something seriously wrong with an investing strategy that can only be “defended” through the use of these sorts of tactics.

    Passive Investing was a mistake. Important research was published showing that short-term timing does not work. The same data that was used to show this also shows that long-term timing ALWAYS works. People jumped to hasty conclusions that all forms of timing do not work and that became the conventional investing wisdom during the out-of-control bull. Now we have seen where that sort of thinking leads and we need to go back, fix the mistake and get about the business of constructing a model for understanding how stock investing works that makes sense.

    It shouldn’t be so hard. Fixing the mistake is a win/win/win. There is not one person anywhere who benefits from not knowing how to invest effectively. Still, the reality in January 2009 is that there are still a good number who are having a hard time letting in the realities or even permitting others to hear about the realities so that they can make decisions for themselves as to whether to let them in or not.

    The future is promising indeed; I believe that we are standing on the threshold of the golden age of middle-class investing. But we have a big hurdle to get over in getting there. If getting the police or lawmakers involved can help, it’s my responsibility to do what I can do to make that happen. I believe that it is everyone’s responsibility. We are all in this together. If this grand mistake leads us to an economic depression, each and every one of us suffers the consequences. So my intent is to continue to do what little I am able to do to get things moving in the right direction.

    Rob

  32. Holy Heaven Rob, you need to chill out on these long posts. They aren’t doing anyone any good.

    I read some of those posts you reference in your “report to the authorities” and it seems that in many cases you have really pulled something out of them that isn’t there. Also, from the more recent responses I’ve read, NO ONE on those boards was investigated or even contacted. (http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1232641858)

    I don’t know why you like doing this, but please do not come dragging it over here. Please take a deep breath and count to 100 before you post. I’d really dislike to see FrugalDad actually have to pull out the ban card on someone.

  33. Holy Heaven Rob, you need to chill out on these long posts. They aren’t doing anyone any good.

    There’s lots of evidence to the contrary, Dave. i have had many people contact me at my site and tell me that the investing advice offered there has saved their hopes for financial freedom. Check out the stories at the “Middle-Class Millionaires” section of the site for a small sample of these. You can read scores more at the “Letters to the Editor” section of John Walter Russell’s site (www.Early-Retirement-Planning-Insights.com). Different people are interested in different things, Dave. It may well be that you do not benefit from reading my posts. You cannot speak for all others.

    I read some of those posts you reference in your “report to the authorities” and it seems that in many cases you have really pulled something out of them that isn’t there.

    I disagree. But that’s something that each person interested in the details needs to check out for himself or herself. There is an extensive public record.

    Also, from the more recent responses I’ve read, NO ONE on those boards was investigated or even contacted.

    This is out of my hands. I obviously don’t control whether particular individuals are investigated or not.

    I don’t know why you like doing this

    Helping people understand how stock investing works is incredibly rewarding work, Dave. I saved incredible amounts of money ($88,000 in my best year) for nine years so that I could do this kind of work in my remaining days. I regret the ugliness we have all experienced a great deal. I certainly do not regret all the wonderful work we have done together. I couldn’t possibly be happier about that side of things.

    but please do not come dragging it over here.

    I believe that you should be asking yourself why it bothers you to hear that Passive Investing does not make sense. Say that Passive Investing really does not work and never can work. Are you not better off knowing this? If the Passive Investing concept is a strong one, it can withstand questioning. If not, it deserves to fall.

    Please take a deep breath and count to 100 before you post.

    I always review my posts one or two times before hitting the “submit” button. That’s the equivalent.

    I’d really dislike to see FrugalDad actually have to pull out the ban card on someone.

    There’s no question but that we need rules that protect us from abusive posting. Most people want to discuss the investing question and they should be permitted to do so. If the site owner elects to pull posts that pull us away from the questions of substance, I am fine with that.

    The other side of the story is that some have legitimate questions about the process matters and some site owners believe (not entirely without justification, in my assessment) that these questions should be permitted. It is my responsibility to respond to those questions to the best of my ability. So I will give it my best shot for so long as those sorts of posts continue to appear here.

    The rule that I follow at my own site is that I permit those sorts of questions for so long as they appear to be sincere in intent. Some of the things that have transpired really are amazing and do have a bearing on the substantive side in that the tactics employed show the weakness of the Passive Investing case. However, I do take stuff down if the questions become so repetitive or hostile that it becomes clear that the poster putting them forward is not acting in good faith.

    What we are seeing here is defensiveness writ large. The newcomer to the discussions should be asking himself or herself — Why? The short answer is that lots of investors and lots of investing “experts” are in a lot of pain today. They got some important things wrong in earlier days and are having a very hard time coming around to acknowledging it. Getting something wrong is just something that happens from time to time to us humans. We all need to accept it and move forward. That’s when the real fireworks (the good kind!) begin!

    Learning Together is wonderful. Hostility to the idea of Learning Together is a stone cold drag. That’s my sincere take re all this.

    Rob

  34. Rob

    I have also read the posts that you reference in your blog in your report to the police. To classify the first as a death threat against you is pure fantasy.

    Maybe you need to take a break and get some perspective.

    RJL

  35. Reply to #32, Rob Bennett on January 23rd, 2009:

    “It is true that I have notified the police, Dave. Appropriately so, as crazy as it should be to say… snippets from posts by over 101 members of the Retire Early and Indexing discussion-board communities… Do you have constructive suggestions to offer re how to deal with this situation, Dave?”

    Rob,
    Yes, I believe I do have some constructive feedback.

    1) I can’t understand why anyone would voluntarily post at a location so far out of bounds that they honestly feel Congress and police involvement is required. The words “Bad Sport” occur to me in regard to your late arriving desire to escalate your on line theoretical quibbles to the realm of the courts. I also am reminded of the old saying “Be careful of what you ask for, because you just may receive it. When God punishes us, it is by giving us what we ask for.”

    2) Regardless of whether I can make sense of it, a review shows that you do seem to spend most of your days there, to the exclusion of other sites, with very little complaint other than on arguments of abstract financial strategy.

    3) So, being a regular contributor, you must have seen that those 101quotes look to have long ago been carefully reviewed and answered using later replies that indicated a far different picture than the one you paint. Link:
    http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1189390571/5#5

    4) Do you think those 101 people were somehow forced to say those later things, and that involvement by Congress and police is somehow actually warranted? I can’t imagine anyone really feeling that way. This discussion has even gotten bizarre, and I can’t see any good in continuing. I predict that the interest from Congress or from any other official body will be lacking with regard to some squabble about the theoretical best ways to invest, and I hope you can resign yourself to that.

    Your history there, and now here, seems to be one of focusing on your supposedly suppressed plight, and not on any nifty ways you have to help others invest. I’m sorry to be so blunt.

  36. I’ve been a lurker at this site for some time, and usually found it interesting, worthwhile and polite. However, Mr. Bennett is far beyond the bounds. It would be bad enough if he simply contented himself with LONG posts devoted to some financial concepts that he doesn’t seem to be able to clearly elucidate, but police involvement? Vast conspiracies aimed at suppressing his message of salvation? Supreme nastiness about supposedly being censored at another discussion board, and one at which he has been and continues to be the most frequent poster?

    I think I’ll move on to other websites rather than expose myself further to Mr. Bennett. With all good wishes, however, I would urge him to seek professional counseling regarding his anger and fear.

  37. Maybe you need to take a break and get some perspective.

    I think the lack of perspective is on the other side, RJL.

    Scott Burns is a personal finance columnist at the Dallas Morning News. Scott and I have engaged in extensive e-mail correspondence on our community’s findings regarding today’s retirement planning studies (most of today’s studies are analytically invalid because they do not include an adjustment for the valuation level that applies on the date the retirement begins). Scott has told me that he agrees with me that valuations need to be considered. He has written three columns about the “New School” research done by my partner John Walter Russell that is used as the engine of the retirement calculator available at my site.

    So all is well, right?

    That’s not right. Scott wrote in one of his columns that the reason why the general media has not reported on the flaws in the Old School studies since they were discovered nearly seven years ago is that “it is information most people don’t want to hear.” I think that’s pretty much on the mark. But is that a good reason not to tell people that the retirement planning tools they are using do not work? My view is that it is a horrible reason.

    Stock investing is an intensely emotional act. Once prices go to insanely dangerous levels, people very, very, very much do not want to be told that this is the case. People want to be told fantasies. There’s lots of money to be made in constructing plausible fantasies and in publicizing them widely (whether this is being done intentionally or not — my belief is that it is usually done without bad intention). But fantasies always hurt us in the long run. The fantasies developed this time were bigger and more dangerous than those we have seen on any prior occasion and the pain that we are living through as a consequence is bigger too. What do you propose be done about this if we are not to speak frankly about the mistakes that were made and get about the business of correcting them?

    The blog entry is suggesting that some might give up on stocks altogether,. There are lots of people giving thought to this idea today. Unless we hear some frank talk about the causes of what happened, this idea is going to catch on. I understand why the idea is catching on. I strongly believe that this is not the way to go, however. Stocks do not need to be so risky an asset class. We make stocks risky by telling tales about them. The risk is not really with the stocks themselves. The risk is with the people who buy them and then long to be told tales about them and with the people who construct and promote the tales.

    All of the things that I describe in the articles at the site happened, both the good stuff (of which there is a lot) and the bad stuff (of which there is also a lot). I’m a journalist by training. I report stories. To ask me not to do so is like asking a dog not to bark. This is by far the biggest story that I have witnessed in my lifetime. What would you expect me to do but to tell people about it?

    I always endeavor to tell the story in a fair and balanced and charitable way. That’s part of the job. Scott Burns is one of my favorite columnists. I have an entire binder filled with columns of his on my bookshelves. But I think that Scott dropped the ball in not telling the story of the flaws in the Old School studies when he first learned of them. Lots of people are going to suffer busted retirements as a result and a busted retirement is a very serious life setback. Investing is a serious subject and serious responsibilities come into play when reporting on it.

    I feel great respect and affection for Scott Burns. I do not believe that he hurt the people he hurt intentionally. I have a pretty good idea of the pressures that caused him not to report that story in the manner in which I believe he should have reported it. Still, I think all this needs to change. People like Scott Burns need to start reporting what they have learned, regardless of whether doing so generates intense emotional reactions on the part of those overinvested in stocks or not. We cannot make good investing decisions unless we know the realities and we cannot know the realities unless people overcome their fears of what will happen to them if they report the realities plainly and bluntly and boldly. We need to overcome the taboo on straight reporting of the realities of stock investing that came to dominate all we hear on this subject during the out-of-control bull market.

    Scott wants to say what he knows. I can tell by reading between the lines of the e-mails he wrote to me. The same is true of lots of other “experts.” It’s true of John Bogle. It’s true of Bill Bernstein,. It’s true of Jonathan Clements. It’s true of Bill Bengen. it’s true of lots and lots of smart and good people. They are willing to help us if we are willing to signal them that we will not endorse vicious smear campaigns against them for the “crime” of telling things as they are.

    Perspectives need to change. You have that part right, RJL. But it’s not the perspectives of those sticking their necks on the line by reporting the realities plain and clear that need to change. It’s the perspectives of those who are afraid to do so that need to change. I look forward to a day when the things that I report on in the e-mail to my congressman are unimaginable. I was working on a belief that these things were unimaginable in the days before I put forward my first post on the flaws in the Old School studies. For good or for ill, I now know better.

    An investing model that leads to this sort of behavior is a failed investing model. This sort of thing should never happen. It’s not the reporting of the realities that is the problem. It is the reaction we too often see to the reporting of the realities that needs to change. We need to hear multiple perspectives. We are all in this together and we all need to work together to get to a better place.

    These are not hasty conclusions. All of this is coming from a guy who has spent seven years of his life studying this stuff up close and personal. Take it for what you think it’s worth. But I am saying it because I think it needs to be said and I have devoted a good bit of mental energy to serious thought and reflection on these questions.

    What we say about stock investing affects people. People matter. We need to make much more of an effort to get this stuff right than we have put forward in recent decades.

    Rob

  38. Guys, let’s please move the discussion forward. I respect both opinions, but frankly I am not sure comments are the place to exchange these kinds of messages. I respectfully ask that you take this offline, via email, or somewhere else other than Frugal Dad. Thanks.

  39. I can’t understand why anyone would voluntarily post at a location so far out of bounds that they honestly feel Congress and police involvement is required.

    The site at which I put forward the first post pointing out the flaws in the Old School retirement studies was Motley Fool. That site has the best rules protecting us from this sort of thing that I have seen. The problem is not with the site or with its rules. The problem is with the reaction that we see among people who are overinvested in stocks at times of insanely dangerous prices and with the failure of Motley Fool to enforce its own rules.

    The words “Bad Sport” occur to me in regard to your late arriving desire to escalate your on line theoretical quibbles to the realm of the courts.

    Getting the numbers right in the studies we use to construct our retirement plans is not a “quibble,” Dave. We need accurate numbers if the plans are to work.

    I believe that legislative changes and police proceedings should be a last resort, not a first resort. I have tried many other avenues over the past seven years. It is only after seeing these efforts not bear fruit and after seeing the great pain suffered by those who are experiencing the busted retirements and financial losses that I made a decision to contact lawmakers and the police.

    There are numerous experts who have agreed in the years since I first posted about the inaccurate numbers that they are in fact inaccurate. These people include: (1) Scott Burns; (2) Bill Bernstein; (3) Ed Easterling; and (4) Larry Swedroe. Yet the studies remain uncorrected to this day. Again, how would you proceed constructively? The case cannot be proven to any greater extent than it was proven seven years ago. We are talking about a numerical calculation. Yet after seven years not one of the invalid studies has yet been corrected and discussion of the errors in the studies has been banned at a number of the discussion boards at which the inaccurate studies are regularly promoted.

    I also am reminded of the old saying “Be careful of what you ask for, because you just may receive it. When God punishes us, it is by giving us what we ask for.”

    The very fact that someone would put these words forward to someone who is trying to prevent failed retirements highlights the nature of the problem we are dealing with here. Do you think it would be a bad thing if the abusive posting were brought to an end and people were permitted to have the discussions they have on numerous occasions indicated they would like to have? What is it that you see as the downside of permitting people to have open conversations amongst themselves about how to plan their retirements?

    Regardless of whether I can make sense of it, a review shows that you do seem to spend most of your days there, to the exclusion of other sites, with very little complaint other than on arguments of abstract financial strategy.

    It sounds to me as though you are referring to the board that I refer to as the “Goon Central” board. Yes, I post there. No, not at all to the exclusion of other boards. I much prefer to post at boards where abusive posting is not permitted and where people can engage in civil and reasoned discourse.

    The Goon Cental board is owned by John Greaney,. He is the author of one of the Old School retirement studies (you can view it at http://www.RetireEarlyHomePage.com). John posted at the same Motley Fool board at which I first posted about the flaws in these studies. The community responded with great enthusiasm to my posts on this topic. John launched a campaign of intimidation against anyone who posted honestly on the topic and burned the Retire Early board there to the ground. Several other boards were started by people who wanted to be able to post honestly on this question.He and his supporters burned those boards to the ground as well.

    I have opposed this behavior from the first day. There is no one who has spoken out against it as often as I have. I asked the owners of the Motley Fool site to remove John from the board. I put up a post there on November 23, 2002 asking other community members to help me in petitioning Motley Fool for his removal. None of this is my doing. I have always spoken in opposition to the abusive posting.

    I post at the Goon Central board for a number of reasons. There’s an article detailing my reasons at the “Banned at Motley Fool!” section of my site. The most important reason is that I want to hear feedback from people who are skeptical of my ideas. That helps me sharpen my thinking and improve the ideas over time. If you check my posts at the Goon Central board, you will see that I am the only poster there who never posts abusively. I respond to questions and comments of substance.

    There have been some good questions raised at that board. There is lots and lots of awful stuff there. I don’t deny that for three seconds. But just because these people are abusive posters does not mean that they are not smart or not capable of asking good questions from time to time. You need to understand that these people are hurting themselves as much as they hurt others. They too need to learn how to invest more effectively (although they will of course not acknowledge that such a thing is possible!).

    Greaney personally believes that the number that he reports in his study as the safe withdrawal rate in truly the safe withdrawal rate. He knows that he cannot defend the study in reasoned debate; that’s why he engages in abusive posting. But he believes that the number is right all the same (I cannot prove this but I am personally convinced that this is so). He is suffering from cognitive dissonance. He is in great pain.

    John is a friend of mine. He praised me to the skies in the days before I posted on the flaws in the Old School studies and I continue to this day to praise him for the good work he has done. John takes all of this very personally. I do not. My goal is to get the Old School studies corrected, to publicize the New School studies, and to reopen all of the Retire Early and Indexing boards to honest posting on valuation-related topics.

    I understand that many view it as odd that I post daily at a board populated by a number of people who are abusive to me. The reality is that it is the situation that is odd; I do what I do out of an effort to come to a better understanding of what is going on.

    Are you able to think of any downside to reporting retirement numbers accurately, Dave? I know that you are not. So why is there any “controversy” about any of this at all? What I and the hundreds of community members who have helped out have done is all good. So why are there so many who express hostility to us? I cannot give you a rational answer to that one. The answer lies in the realm of emotion. Investing is an intensely emotional endeavor. This is the great overlooked truth of stock investing.

    So, being a regular contributor, you must have seen that those 101quotes look to have long ago been carefully reviewed and answered using later replies that indicated a far different picture than the one you paint.

    I know what you are referring to, Dave. I am friends with most of the posters you are referring to here. A few of them I have met in “real life.” There are all sorts of tricks being played in the response post you are referring to. In some cases, threats were made against the people who agreed with me and then those people changed their story. Which story do you think is the right one, the one made before the threats or the one made after?

    Check out what has been said by people like Scott Burns, Ed Easterling, Bill Bernstein, and Larry Swedroe. These are recognized experts in the field. Swedroe has said that the Old School studies are a case of “Garbage In.Garbage Out.” Why do you think he says that? He says it because it is so. All the rest follows from that obvious truth. The Old School studies cannot be defended in honest and reasoned debate. So we get this other stuff instead by those who feel an intense emotional need not to acknowledge the errors.

    Do you think those 101 people were somehow forced to say those later things, and that involvement by Congress and police is somehow actually warranted?

    Only a tiny fraction of the 101 changed their views. Yes, some of them were forced. I saw it happen and the Post Archives document this.

    Yes, I believe that police action and congressional action is warranted. There are millions of people who are likely going to suffer busted retirements as a result of the errors in the Old School studies. Many of those people can still make changes in their retirement plans to improve their odds. We should be doing all that we can to publicize the errors in the Old School studies and to help people become aware of the New School studies. We need to talk straight with people to win back confidence in the markets.

    This discussion has even gotten bizarre

    The entire thing is bizarre. It’s all 100 percent nutso. There is no possible harm that could come to anyone from having accurate numbers to plan his or her retirement. Yet you see what you see. Investing is an intensely emotional life endeavor, Dave. That’s the piece of the puzzle that you are missing. I have caused people pain by reporting the numbers accurately. I don’t say otherwise. The question is — Are they better to feel that pain by hearing the realities from some guy who posts stuff on the internet or to learn about them by seeing their retirement money go “poof!”

    I predict that the interest from Congress or from any other official body will be lacking with regard to some squabble about the theoretical best ways to invest

    I am not seeking congressional or police help re the investing questions. People can figure that stuff out for themselves so long as they are permitted to hear both sides of the story. I am seeking congressional and police help so that we can bring an end to the abusive posting practices that are blocking the realization of the desire expressed by thousands of my fellow community members to be able to hear both sides of the story. Once we open the board up to honest posting by those on both sides, the rest is downhill sledding.

    Your history there, and now here, seems to be one of focusing on your supposedly suppressed plight, and not on any nifty ways you have to help others invest.

    Check the history of this thread, Dave. You’ll see that I am not the one who brought up the process questions. I prefer to discuss the substance side of things. However, I do make an effort to respond to process questions when they are put to me. I think that some of these questions are genuine and not entirely off point.

    I’m sorry to be so blunt.

    Please don’t apologize for being blunt, Dave. I prefer to know where you are really coming from when trying to answer your questions. It helps me know what aspects of the question to which to direct my focus.

    Please continue to think it all over, my new friend. If you believe (as I do) that the intensity of the reaction tells us that something important is going on, I think I can safely say that we truly have a tiger by the tale re this one!

    Rob

  40. Very sorry to repeat myself, but at the risk of a *tiny* redundancy on my part, I just can’t reply to Mr. Bennett’s lengthy comment any more plainly than I already have, so at this point, I will leave the thread to Mr. Bennett and others who may chose to continue:

    (repeating)
    [i]The words “Bad Sport” occur to me in regard to your late arriving desire to escalate your on line theoretical quibbles[/i]

  41. @FrugalDad

    Have you been lied to?
    yes

    Mostly though, I would go with the term “grossly misled”. But hey, most people hardly understand the basic functioning of the stock markets let alone it’s intricacies. The average American doesn’t understand the nature of the trade deficit or how inflation works (or what the heck deflation actually is). We have charlatans like Kiyosaki selling books like “Rich Dad…” and millions of people buying.

    So if it’s any consolation, it’s kind of a mass delusion.

    But more to the point, your questions:

    Can we beat inflation (which is really currency deflation) by refusing to inflate our lifestyles and living frugally?

    Really depends on scale. For short periods, I’m sure that you can, but if you plan to retire at 65 and live until you’re 95 without any form of real production, then you’re going to have to leverage a lot of people to get there.

    Personally, I figure the easiest way to beat inflation is to out-produce inflation. There is no known limit on a human’s earning capacity as there is no limit on their production capacity. You can either build a nest egg by hoarding the goods you have and sharing (investing) them in hopes of beating the averages. Or you can build a nest egg by leveraging your talents and skills then sharing (investing) those skills and talents into greater production.

    Instead, should we be simply putting money in high-yield savings accounts, bonds, and CDs, and prepare to live off the interest?

    Depends on your education. I know more people that would benefit from increased personal and professional development than people who would benefit from earning an extra 1% / year on their investments.

    I know more people with untapped potential for creating value than I know people with under-utilized investments.

    So yes, most people could do very well with low-risk instruments as long as they knew where to really put their efforts.

    …if that rebound occurs and they are made whole again…

    Here’s the deal, if you traced a line from January 2000 to January 2008 (pre-crash) on the S&P you were down money. Or more accurately, you were down real purchasing power. People are talking about a “rebound” but in real terms, we’re in the midst of an 8-year bear market.

    Even if stocks do rebound are they ever going to achieve the necessary heights?

    If you make 10% on your stocks will that make you happy?
    Obama is “printing” 10% of the US GDP this year. Your money was invented and backed by nothing. Still happy?

    Look, unless the US can reverse the trend and turn the trade deficit into a surplus, then it won’t really matter. Right now, the US is a giant hole for money and the only way out is to print a bunch of money to pay off all of the debts (or to use the world’s largest army and secure some more resources).

    Of course, every dollar the US “prints” by taking on deficits makes your dollars less valuable. So if you go back to the first point about investing with CDs, I think that we need to really take a different tack.

    Imagine that you’re working tech support in the US. Now compare your quality of life to that of a tech support specialist in India. Now explain why the tech support individual in the US deserves a lifestyle that is far more “privileged” that Indian worker.

    They do the same job, often for the same people. If they do this at the same skill level, then why does the American “deserve” a car when the Indian can hardly afford a motorcycle.

    I think it becomes quickly apparent that the premier way to maintain and improve quality of life is to provide value. Yes, in some way, having money to lend is providing value. But for most people, their largest untapped resource is simply their ability to create a better world and a better life for those around them.

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