Question #1 on the Our Unique Asset Allocation Calculator — What Does the Scenario Surfer Do?
It allows you to experience the ups and downs of the stock market without putting money at risk. The asset allocation calculator (see tab at left marked “Scenario Surfer”) generates realistic returns sequences going out 30 years so that you can see how various asset allocation strategies are likely to fare in the real world.
Question #2 on Our Unique Asset Allocation Calculator — Aren’t There Other Calculators That Do Something Similar?
The Scenario Surfer is based on the research of John Walter Russell, owner of the www.early-retirement-planning-insights.com site. That means that it shows dramatically different results for stocks purchased at times of high valuations than for stocks purchased at times of moderate or low valuations, just as is the case with the historical stock-return data itself. Most existing calculators ignore the effect of valuations (by mixing the data for wildly different valuation levels into one big bowl of Data Soup) and thus report artificial and misleading “findings.”
Question #3 on Our Unique Asset Allocation Calculator — Does Knowing the Starting-Point Valuation Level Tell You All That You Need to Know to Be Able to Report Long-Term Returns With Precision?
By no means. The starting-point valuation level is a big factor. Chance is also a big factor. The asset allocation calculator relies on random number generation to simulate the effect of chance. The results are not purely random, however. The odds of obtaining good results from stocks are better for purchases made at times of moderate or low valuations, just as is the case in real-life investing. The aim was to make the asset allocation calculator as true to life as possible.
Question #4 on Our Unique Asset Allocation Calculator — Isn’t It a Rejection of the Efficient Market Theory to Say That Stocks Offer a Better Long-Term Value Proposition at Times of Low Prices?
Yes, that’s so.
This calculator is rooted in a rejection of the Efficient Market Theory. My view is that the Efficient Market Theory is probably the worst thing that ever happened for middle-class workers hoping to achieve financial freedom early in life. If you are a confirmed fan of the Efficient Market Theory, this calculator is going to bum you out.
Question #5 on Our Unique Asset Allocation Calculator — How Can I Be Sure That Your Calculator Is Entirely True to Life?
You cannot be entirely sure. Even the authors of the calculator (John Walter Russell and Rob Bennett) are not entirely sure. We’re working on it! We’re working on it!
The calculator is based on John’s innovative research, which he began in response to the controversy raised by a post that Rob made to a Motley Fool discussion board that kicked off a remarkable series of discussions referred to now as The Great Safe Withdrawal Rate Debate. Thousands of investors have participated. A good number of experts have been consulted. Hundreds of research inquiries have been explored. We believe that John’s findings will stand the test of time. But it is important that you understand that a limited number of people have done research on these questions and that it would be unwise to place total confidence in these findings at this time.
Question #6 on Our Unique Asset Allocation Calculator — So Is It Safe to Rely on These Findings Or Is It Not?
The world of investing research is a mess today. Most of the research available to us today is rooted in a belief in the Efficient Market Theory, which has been discredited. Only a small number of “experts” are brave enough today to acknowledge that today’s dominant investing model does not stand up to serious scrutiny. Acknowledging this reality means rewriting all the textbooks starting at Page One. It’s a big job!
Investors are today living in the Twilight Zone. The old model has failed us. The new model is only now being born and has not yet been subjected to sufficient testing to justify total confidence in it. My take is that we all need to work together to sort things out the best we can. If we see people placing too much confidence in the old model, we should warn them of the risks of doing so. If we see people placing too much confidence in the new model (I call it The Investing for Humans Model — I would, wouldn’t I?), we should warn them of the risks of doing that.
The risks of placing one’s confidence in the old model are so great that I feel compelled to speak out strongly against it. But I think that prudence demands that my advocacy of the new model be reined in by a certain measure of humility until enough smart people have studied it in depth for us to be sure that there are no big flaws in the thinking of the many Retire Early Community members who made contributions to its development.
We need more research based on the new Investing for Humans model to replace the research that was done under the old Efficient Market Theory model. While we are in a time of transition from the old model to the new one, caution (combined with an appropriate measure of excitement over our breakthrough findings) is advised.
My advice is to not make use of the asset allocation calculator unthinkingly. Read the investing articles at this site and at John’s site, which contains a good bit of additional material on this asset allocation calculator. Ask John and Rob questions about what you read. Check what has been said by the other experts cited. Spend a little time going over the historical data yourself so that you have some idea where John and Rob are coming from with their investing ideas. If everything checks out and makes sense, then you are in a position to consider taking action based on what you learn from use of the Scenario Surfer.
Even then, be sure to stay open to hearing criticisms of the methodology of the calculator. Never rely on the advice of only one or two experts in making investing choices that can cause you to lose real money in the real world.
The bottom line on all this? Whatever you do, don’t sue me!
Question #7 on the Our Unique Asset Allocation Calculator — Do You Not Understand That These Warnings Leave Me More Confused Than Ever?
Those are encouraging words. The first step to getting investors at a point at which they are able to develop confidence in a long-term investing strategy is getting them to shake off their belief in the dogmas of earlier days. That stuff doesn’t work.
We hope that this asset allocation calculator is going to be a big help in pointing people to what does. But we very much do not want to repeat the mistakes of those who went before us. Our goal is to put forward the best information available to us, but in a spirit of humility so that our tentative assessments will be questioned and strengthened and changed over time. I think it is fair to say that so far the new model has stood up to every test (and there have been a good number of tests over the course of the past five years, to be sure — I sometimes get the feeling that I am back in school again, except that this school is a school in which every instructor believes in giving pop quizzes every day!).
Feeling confused today is appropriate, given what the “experts” have been telling us for the past 30 years about how to invest effectively for the long run and given what we have in recent years learned that the historical stock-return data itself tells us on this important question. If you are feeling confused, I feel that I have done my job. Feeling confused is a big step forward over feeling confidence in claims that defy common sense.
It may help for me to let you know that examining the historical data in realistic ways has helped me over time to feel less confused rather than more so. The Investing for Humans model makes sense. The fact that the data supports the core principles of this approach rather than refutes them has caused my confidence to grow stronger each time I explore new questions rather than causing me to become hostile to questioning of my strategies (I think it can fairly be said that most of today’s “experts” are hostile to questioning of the conventional advice).
My take is that the benefit of taking into consideration the message of the historical stock-return data is that the historical data is objective evidence. It makes all the difference in the world to have something solid to turn to for sorting things out when different “experts” put forward equally dogmatic claims that contradict each other. I have no problem with the idea of people offering their personal opinions, but I like opinion to be labeled as opinion and fact to be labeled as fact. When I look at the historical stock-return data in an analytically valid way, I am learning the facts of long-term stock investing. Knowing the facts makes it a whole lot easier to understand what is behind all of the conflicting expressions of personal opinion (often labeled as fact).
Experts who have not ever checked their strongly held opinions about stocks against the facts (or who, worse yet, have relied on analytically invalid methodologies to ascertain what the facts are) often become defensive when challenged by the facts. Not good. When I see defensivness in an investing advisor, I run. I am a big believer in buy-and-hold investing and I do not believe that defensiveness and buy-and-hold strategies work at all well together. Implementing buy-and-hold in the real world requires confidence and calm in the face of serious challenges to one’s strategies. “Experts” who become upset when questioned about their ideas do not strike me as being the sorts of people likely to point the way to successful implementation of buy-and-hold investing strategies.
Feeling confused is a natural reaction to learning about the state of investing knowledge that applies today. We have “experts” demanding our continued support of ideas that simply do not stand up to scutiny. And we have new ideas that show a great deal of promise but that have not yet been examined by enough people for a long enough time to justify complete confidence just yet. In these circumstances, confusion is an appropriate response. This is a time for learning and it’s when we are confused about a matter over which we know in time we want to possess clarity that we learn the most.
Our new asset allocation calculator is above all a learning tool. Run some scenarios! Learn! If you have in earlier days placed your confidence in the conventional gibberish re how long-term stock investing works, learning will cause you to experience a good bit of confusion. Go with that feeling! My advice is that you view confusion as a step forward.
There’s a saying that it’s not what you don’t know that hurts you the most, it’s what you know for certain that just isn’t so. I believe that that very much applies in the investing field. What the Retire Early community has discovered in recent years is that the reason why the conventional investing advice has never seemed to quite add up is that it really does not quite add up. To identify what really works we first need to let go of the failed ideas of the past.
The most important thing we need to know is what we don’t know. We don’t “know” that rebalancing is a good idea. We don’t “know” that market prices are efficient. We don’t “know” that long-term timing is impossible. Once we know what we don’t know, it becomes possible to know things about investing that really are so.
Hopelessly confused? Good! That puts you above 80 percent of the “experts” bringing in big gobs of money by spouting nonsense about how long-term stock investing works. The truly confused are in good company today. Common sense is “confused,” according to the experts. The historical stock-return data too is “confused,” according to the experts. Even the experts themselves are confused, according to the experts (one of the things we have learned in our community discussions is that the big-name experts have a habit of offering on some occasions statements that are in complete conflict with statements they have offered on other occasions). Oh my!
Acknowledging that you are feeling confused is a plus. Acknowledging that you are confused means that you have reached a point at which you are at least able to be honest with yourself about how much you do not now know. Those who have reached that point are several steps ahead of most of the guys and gals bringing in the big bucks to tell the rest of us how to invest. It sounds paradoxical, but I think it is a valid point all the same — the true investing experts of today are the ones most struggling with their confusion!
You’re the true expert. John and I created the asset allocation calculator to provide you a tool to learn things about stock investing that most of today’s experts dare not publicly acknowledge is so.
Question #8 on Our Unique Asset Allocation Calculator — What Is the Biggest Difference Between What This Calculator Says and What Earlier Ones Have Said?
This asset allocation calculator says that rebalancing (to rebalance is to sell stocks when prices rise and to buy stocks when prices fall for the purpose of maintaining the same stock allocation despite prices changes that would otherwise cause the percentage of one’s portfolio held in stocks to increase during times of rising prices and to decrease at times of falling prices) does not work. There is some merit in the idea of sticking with the same stock allocation at a time of rising prices because that is better than permitting one’s stock allocation to go higher at times of overvaluation. As a general rule, though, the historical data shows that it is better to hold more stocks when stocks are being sold at good prices and to hold fewer stocks when stocks are not being sold at good prices. When stock prices are as high as they are today (this article was posted in October 2007), you should have a significantly lower stock allocation than what made sense for you when stocks were selling at more reasonable price levels.
Question #9 on Our Unique Asset Allocation Calculator — Have You Truly Gone Flat-Out Bonkers?
There are more than one or two who have put this idea forward as a live possibility. My personal view is that my Bonkomometer is turned not more than a few degrees above what is required to get though the day in this Consumer Wonderland of ours in the year 2007.
I think it would be fair to say that my wife Boo is the person best positioned to say for sure. She flips back and forth on this important question.
Question #10 on Our Unique Asset Allocation Calculator — What If I Try the Calculator and Don’t Like What It Tells Me About the Risks of Investing in Stocks Today?
We offer a Double-Your-Money-Back Guaranty for all of our customers who are not pleased with the numbers that pop up for those testing what is likely to happen to a strategy calling for a high stock allocation at today’s price levels. Such a deal!
Bonus Question #11 on Our Unique Asset Allocation Calculator — Can’t You Be Serious for Ten Minutes?
I can imagine circumstances in which I might be able to pull it off for ten minutes. At a funeral of a loved one, for example.
Forming expectations of hearing serious responses from old Farmer Hocus for a period of time extending much beyond that is pushing the stress capacity of the Bonkomometer to its limits, to be sure.