Edited: Denial Is Expensive

Ignoring our cutting edge research can be expensive.

We have established:

1) It is possible to measure stock market valuations in a meaningful way. Actually, we have identified three excellent methods.
2) It is possible to relate Safe Withdrawal Rates and valuations.
3) It is possible to take advantage of valuations by varying allocations. Doing so improves Safe Withdrawal Rates. In terms of today’s rhetoric, this is intermediate-term timing. In terms of Benjamin Graham’s writings, it is not. It is the action of an intelligent investor.
4) TIPS and ibonds make great baseline portfolios.
5) Rebalancing makes sense only if it is impossible to measure valuations in a meaningful manner.
6) At today’s valuations, even dollar cost averaging can be a bad idea.
7) Dealing with human emotions is, by far, the most important factor in successful investing. This is NOT simply a matter of increasing an investor’s willingness to accept risk. "Close your eyes and grit your teeth" is a formula that leads to bankruptcy.

Here are some reactions to our key findings:

1) Treat the 4% withdrawal rate as a rule of thumb. Pretend that this was always so.
2) Treat the 4% withdrawal rate as a historical result which, because it refers only to the past, is absolutely true.
3) Acknowledge, belatedly, that TIPS provide a Safe Withdrawal Rate greater than 4% over 30 years.
4) Acknowledge, reluctantly, that valuations may influence Safe Withdrawal Rates but quickly jump in to claim that nobody can do anything about it.
…

We have identified three attractive investment approaches. They can be combined:

1) Using a TIPS and/or ibond baseline portfolio.
2) Varying stock allocations in accordance with valuations (total return approach).
3) Varying stock allocations in accordance with valuations to purchase high quality stocks with high
dividends (dividend strategy).
Have fun.

John Walter Russell
October 2, 2006
Edited: December 18, 2007