April 14, 2009 Letters to the Editor

Updated: May 18, 2009.

Yahoo Briefcase

I received this letter from Thomas.

I noticed that Yahoo discontinued their service of the briefcase. I was particularly interested in looking into the spreadsheet you did regression analysis on PE10. I have tried to do this myself, but do not come up with an R2 close to as good as yours. I was hoping to reconcile the differences to see how much credence I put into PE10. If you have listed your spreadsheets on another service please let me know. Otherwise if you would be so kind as to send me one with a regression analysis of PE10 I would greatly appreciate it.


Thank you. I did not know that Yahoo had discontinued its briefcase service. This came as quite a surprise.

Here are the secrets to doing the regression analysis:

a) Perform the regression analysis on 100E10/P (the percentage earnings yield) as opposed to P/E10.

b) Use the years 1923-1980.

The first part is critical. The second merely removes a couple of outliers from the data.

In addition, I used January data. I used real (inflation adjusted) returns.

As a final note, remember that the correlation is the square root of R-squared. The fit is better than casual observers might think.


I have put up a button on the left with S&P500 data including P/E10. I intend to create some graphs later that will show the correlations themselves. In addition, I have placed a link to Refusing to See the Obvious in the Foundations section.

Addendum 2

Interestingly, P/E10 does a better job of predicting total returns than the percentage earnings yield 100E10/P. The opposite is true when calculating Safe Withdrawal Rates.


I received this letter from Mike.

I like your suggestion of large amounts of TIPS. However, since TIPS have not been in existence long we really don’t know what the Government is going to do if inflation goes up a lot and fast. Do you think they will "fudge" or find ways to lessen the CPI factor as it applies to TIPS? I am concerned about it doing so given the amount of money it is spending and printing.


Thank you. This is a common concern about TIPS and other inflation protected securities.

I doubt that the Government will cook the books, but they could. I disagree with others who claim that they are doing so already.

Remember that all inflation reports go back to the same sets of data. [There are several groupings.] Keep this in mind when comparing TIPS to other investments.

Still, the TIPS inflation adjustment is based on the earliest set of data. It is NOT revised later, as are the standard inflation measures. This can cause a mismatch.

The biggest issue with inflation measures is that they never match one’s own, personally experienced level of inflation. For example, older people have greater health concerns than the public at large. They feel the effect of health related price increases directly. People who own their own homes do not experience a benefit from their reduced “equivalent rent” as home prices fall.

Most people expect a general improvement in their standard of living in the absence of inflation. Computers, for example, become more capable. Internet providers deliver more speed at the same price. Many economists believe that inflation should be for a stagnant standard of living. They believe that the current inflation adjustments overestimate inflation by about 1%. Rest assured, there would be a lot of publicity should they prevail. Too many people are affected by inflation adjustments including those on Social Security.

Should It Be "The Multiply-by-20 Rule"?

I received this letter from Rob Bennett.

I love these two sentences in the article "The Safe-Withdrawal-Rate (SWR) Solution": "Peter Lynch, it turns out, was right. He just did not know how to accomplish his goal." I never thought about it that way before. That is an illuminating way of putting it.

What Lynch said made intuitive sense. If stocks provide long-term average returns of 6.5 percent real, you should be able to take out 6.5 percent real each year. Scott Burns pointed out a flaw that resulted from the volatility of the income stream. But he missed out on the means of correcting the flaw -- the need to take valuations into account when setting your stock allocation. Do that, and you essentially smooth out the income stream. The problem that caused the SWR to be pulled so low for those who followed the Passive Investing model is removed for those who abandon the discredited and limiting model.

In the days before the crash I often used to have people respond to accurate reports of the SWR by saying that it was "depressing" to hear that the number was so low. I can easily see how it would be depressing for those unwilling to do anything about it. But for those willing to take steps to protect their portfolio from the long-term effect of insane overpricing, it was not depressing at all. It is never depressing to learn the realities. It is liberating. Learn the realities and you can smooth out the income stream from stocks so that it gets much closer to the average long-term return of 6.5 percent. Doing that permits you to achieve a safe retirement many years sooner.

There's an implication re this that has been on my mind for some time but that I have held off on writing about just because I have so many other things on my plate. I have an article at my site urging people to use the "Multiply-by-25 Rule" (that is, multiply annual expenses by 25 to know how much you need to save to be able to retire safely under the assumption that a 4 percent withdrawal always works) to determine when they can safely hand in their resignations from corporate employment. Given what we now know about investing, it no longer needs to be the "Multiply-by-25 Rule." With techniques available to smooth out the income stream from stocks, we can safely go with a 5 percent takeout in retirement. That turns it into the "Multiply-by-20 Rule." That permits retirement many years sooner.

It is rare to see something that it is all upside and that possesses precisely zero downside for anyone. I believe that the New School approach to SWR analysis fits the bill. Calculating the numbers accurately opens up our minds to hundreds of wonderful insights as to how stock investing works in the real world. If only we could all learn to forgive ourselves for the harm we did to ourselves and our friends during the years when we believed in Passive Investing!


Thank you. You are right. We can use a Multiply-by-20 Rule. It works.

If you look at the Year 30 Safe Withdrawal Rate Retirement Risk Evaluator [Year 30 SWR button on the left], set P/E10=20 and select Switching A and Switching B, you will see that a 5% (plus inflation) withdrawal rate is Reasonably Safe. Yet, we know that there were a variety of approaches that would have brought the safe withdrawal rate above 5% (plus inflation). TIPS, for example, yielded more that the 3% needed to reach a 5.1% (plus inflation) 30-year withdrawal rate. Delayed purchase, dividend and income approaches all worked well when P/E10 was above 20.

A Multiply-by-20 Rule makes a lot of sense.

The Safe Withdrawal Rate Solution

We Should Let the Financial Planners Off the Hook

I received this letter from Rob Bennett.

I agree with the points you made in your Note re "Financial Planners."

I have one observation to make re the point that few financial planners feel that they could have "gotten away" with having investors at low stock allocations during the years of sky-high prices. There's no question but that most financial planners feel this way and not entirely without justification. It is certainly true that many clients would have had a hard time accepting advice to lower their stock allocations at a time when stocks had been for a long time providing great short-term returns.

My take is that this is a chicken-and-egg problem. The Stock-Selling Industry does not educate middle-class investors about the effect of valuations on long-term returns because middle-class investors are "too emotional" to accept the reality. And middle-class investors are "too emotional" to accept the reality because they have not been educated regarding it. Do financial planners give bad advice because investors are emotional or are investors emotional because financial planners give bad financial advice?

There have been hundreds of millions of dollars directed to marketing the idea that "timing never works" over the past three decades. But the claim that "timing always works" is every bit as accurate a claim (since every study of long-term timing shows that timing works just as every study of short-term timing shows that short-term timing does not work). What if The Stock-Selling Industry voluntarily agreed to spend hundreds of millions now to fix the problems they caused with their earlier marketing claims? Or what if the government required the industry to do this as part of an effort to help our economy recover from the crisis resulting from the insane overvaluation caused by the heavy promotion of Passive Investing (possibly in exchange for an amnesty from civil liability for the bad investing advice that advocates of Passive Investing have been advancing for decades now).

There is no law of the universe that says that the interests of financial planners and their clients need to be at odds. The entire problem came about because the academic research showing that valuations affect long-term returns was published AFTER The Stock-Selling Industry had already directed a good bit of money and effort to the task of persuading investors of the merits of the Passive Investing model. Is there any reason to believe that the industry could not continue to thrive after middle-class investors were informed of the realities? I sure am not able to think of any.

I believe that most financial planners would love to be able to offer more effective advice. I believe that the obstacle to them doing just that is a concern that exploring the implications of the research showing that valuations affect long-term returns is taboo (because it will cause the Passive Investing model to crumble to the ground). Let it fall! It helps no one at this point. Not the financial planners. Not the middle-class investors. Not the economy as a whole.

If The Stock-Selling Industry were dealing with a clean slate today, I don't think that there would be anyone arguing that it makes sense to tell investors to stick with the same stock allocation at times of wildly different valuation levels. The idea that there is no need to change one's stock allocation in response to big price swings is a holdover from an earlier era, an era when the evidence that the Efficient Market Theory is wrong was nowhere near as compelling as it is today. The job is to transition from efforts to prop up the failed model to efforts to educate investors about what really works in the long run.

It is an artificial and an unhealthy state of affairs for there to be such a gap between the true best interests of middle-class investors and the perceived best interests of the financial planners. The problem goes away with the financing of a public education program. I believe that all parties concerned about economic recovery should be pushing for a huge marketing campaign aimed at educating investors that it is every bit as critical to engage in long-term timing as it is to avoid short-term timing. Once hundreds of millions have been spent promoting the idea that long-term timing always works, I don't think that financial planners will ever again feel the pressures they have felt in recent years to avoid informing their clients about the most important research in the field and the most important realities for those seeking to become successful long-term investors.

My point here is that the existing conflict between the interests of the financial planners and the interests of their clients is a temporary phenomenon. It is a holdover from the Passive Investing Era that will pass as that era is brought to an end and replaced with a widespread consensus that long-term timing is required for long-term investing strategies to work in the real world.


Thank you. Very well said.

I made my original comments in the Notes starting from May 5, 2009. I titled my NOTE “Financial Planners.”

Notes starting from May 5, 2009

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