About Our Unique Investment Strategy Calculator

Question #1 on the New Investment Strategy Calculator — What Is the Investment Strategy Tester?

It’s a calculator developed by John Walter Russell (owner of the www.Early-Retirement-Planning-Insights.com web site) and Rob Bennett (owner of the www.PassionSaving.com web site). It is the fourth investment calculator they have developed together. The earlier three calculators are: (1) The Stock-Return Predictor; (2) The Retirement Risk Evaluator; and (3) The Investor’s Scenario Surfer.

Each of the last three calculators builds on the insights mined by use of those that came before it.

Investment Strategy Calculator

The Return Predictor uses a regression analysis of the historical stock-return data to reveal to investors the most likely long-term return on a purchase of a broad U.S. index fund at any of the various possible valuation levels. It shows that Passive Investing (sticking with the same stock allocation regardless of price) cannot work in the real world because the price paid for stocks plays a huge role in determining the investor’s long-term return. The calculator shows that the most likely annualized 10-year return for stocks purchased at the prices that applied in the early 1980s was 15 percent real while the most likely annualized 10-year return for stocks purchased at the top of the bubble was a negative 1 percent real. There is obviously no one stock allocation that makes sense in both sets of circumstances.

The Risk Evaluator uses the same approach (considering the effect of valuations rather than ignoring them as is commonly done in studies constructed pursuant to Passive Investing principles) to identify the safe withdrawal rate (SWR) at all of the various possible valuation levels. The Old School SWR studies report the SWR as a single number (it is these studies that were responsible for the infamous “4 percent rule”). The Risk Evaluator is the only analytically valid SWR calculator available on the internet today (this article was posted in June 2009). It reports that the SWR can rise to as high as 9 percent at times of low valuations and can drop to as low as 2 percent at times of high valuations.

The Scenario Surfer shows that timing the market beats rebalancing in the vast majority of 30-year returns sequences that are consistent with those we see in the historical record. The calculator permits the user to compare the results she would obtain from following a rebalancing strategy (Passive Investing advocates urge “rebalancing” — sticking with the same stock allocation despite big price changes) with the results she would obtain from following a Valuation-Informed Indexing (VII) strategy. It shows that VII strategies yield better results in the vast majority of returns sequences; the difference is so stark that I think it is fair to say that VII always beats rebalancing on a risk-adjusted basis (a strategy that prevails in only about 1 in 10 of the possible returns sequences is obviously a high-risk bet). Those who overinvest in stocks at times of insanely high prices are all but certain to fall behind Rational Investors sooner or later, and, once they do, the compounding returns phenomenon causes the rational edge to grow and grow and grow over time.

The Strategy Tester runs 1,000 tests of any of the scenarios examined by The Scenario Surfer and reports the probabilities of various outcomes. For example, you might want to know whether there are any 30-year return sequences starting from the top of the bubble that might come up in which rebalancing to an 80 percent stock allocation would provide better results than a simple Valuation-Informed Indexing strategy. The calculator reports that there are very few. At 30 years out, the worst-case scenario for the VII strategy is better than nearly 50 percent of the possible scenarios for the rebalancing strategy. The most likely scenario for the VII strategy shows a portfolio balance about 50 percent larger than the portfolio balance for the most likely scenario that applies for the rebalancing strategy. Hundreds of different strategies can be compared through use of the new calculator.

Question #2 on the New Investment Strategy Calculator — What Makes the New Calculator “Unique”?

Online Investing Calculator

There is a mountain of material available on the internet to help you learn how to invest effectively. Unfortunately, roughly 90 percent of this material is influenced by the Passive Investing concept (the idea that it is not necessary to change your stock allocation in response to big price changes).

Evidence that Passive strategies cannot work in the real world has been building for 28 years now (Robert Shiller published the first study showing that valuations affect long-term returns in 1981). Most Passive Investing advocates have responded to the mountain of research pointing to a better way to invest not with enthusiasm but with defensiveness. Honest posting on valuation-related topics has been banned at numerous places on the internet, including at the Motley Fool site, at Morningstar.com, and at IndexUniverse.com. Thousands of members of the Retire Early and Indexing discussion-board communities have expressed a desire that the Ban on Honest Posting on safe withdrawal rates and other important investing topics be lifted. However, until the ban is lifted (and until the taboo on talking straight about stock investment that limits honest discussion off the internet is overcome as well), realistic guidance on how to invest effectively for the long run is likely to remain scarce.

The results generated by The Investment Strategy Tester are in accord with what common sense tells us about how stock investing must work in the real world. The results generated by The Investment Strategy Tester are in accord with what the historical record tells us about how stock investing always has worked in the real world in the past. So there should be nothing whatsoever “unique” about this calculator — if investing were a 100 percent rational endeavor, there would be hundreds of such calculators available on the internet.

However, the results generated by The Investment Strategy Tester are very much not in accord with what The Stock-Selling Industry has been telling us about how stock investing works for about 30 years now. And the results generated by The Investment Strategy Tester are very much not in accord with what the Taboo on Straight Talk about Investing permits most of us to say about the subject. This investment strategy calculator should not be unique. But the sad reality is that for the time-being it is.

Question #3 on the New Investment Strategy Calculator — Is There a Danger in Making Use of a Calculator that Employs a Methodology Not Widely in Use Today?

There is. One of the best ways that we humans have discovered for testing our ideas is running them past lots of other humans. There is special value in running our ideas past those other humans who are skeptical of our claims. This is why I have directed years of effort to opening up discussion boards and blogs to honest posting on the flaws in the Passive model. The vast majority of Passive Investing advocates are smart and good people who could help us sharpen our ideas if only we could engage in civil and reasoned discussions with them. Unfortunately, a small number of intensely abusive Passive Investing dogmatists today holds veto power over what investing topics can be discussed on the internet. We have obtained helpful feedback from hundreds of wonderful community members. However, we have benefitted from only a fraction of the feedback that we would have benefitted from had the site owners of the various board and blogs enforced their posting rules in a reasonable manner.

This hurt us all. John and I have worked hard to make these calculators the best tools they can be. But we are of course flawed humans, like all the others. It is possible that we have made mistakes and that the ban on honest posting has blocked us from learning about these mistakes through interaction with our fellow community members. Please give this caveat some consideration before making use of the investment strategy calculator to inform your investment decision-making process.

Question #4 on the New Investment Strategy Calculator — Might It Not Be Safer Then to Stick with Calculators Developed Pursuant to the Passive Investing Model Until the Rational Model Tools are Subject to Scrutiny by Larger Communities?

Free Investing Calculator

I don’t think so. It is possible that there are flaws in the tools that have been developed pursuant to the Rational Model. It is certain (or at least it seems so to me) that there are flaws in the tools that have been developed pursuant to the Passive Model.

Passive Investing is not a neutral approach. Its assumptions are dangerous assumptions in the event that they do not stand up to scrutiny (and it appears to me that the evidence is strong indeed that the Passive Investing assumptions do not stand up to scrutiny).

There is no entirely safe way for an investor to proceed today. There will not be a safe way to proceed until the internet has been opened up to honest posting and we are able to see both the Passive Investing Model and the Rational Investing Model effectively challenged and see which model passes the test and which model fails the test.

Question #5 on the New Investment Strategy Calculator — Is There Anything That I Can Do To Bring About An End to the Ban on Honest Posting?

The Ban on Honest Posting is a community reality and it will take community action to bring it to an end. The ban does not apply only on the internet. It’s not even possible that such a ban could apply only on the internet. If the ban did not apply elsewhere, people would be able to educate themselves re the realities, and once educated about the realities, they would be able to post on the internet about what they learned. The knowledge that people picked up elsewhere would foil the efforts of any abusive posters to impose a ban on the internet.

Robert Shiller, a tenured Yale professor who is the author of the book Irrational Exuberance, recently said in an interview that he has long been reluctant to report all that he has learned about stock investing as a result of his research because he would be viewed as “unprofessional” if he did so. That’s how the ban works. During times of insane overpricing, a social Taboo is put in place that makes all of us hold back from saying clearly what we believe about stocks. Some do express misgivings about the conventional wisdom, to be sure. But even they refrain from stating their beliefs as strongly as they feel them. And many others express strong beliefs that overpricing is not a problem. The combined effect is that it comes to be seen as “rude” to report in clear and frank terms what the historical data says about the effect of valuations on long-term returns. Out-of-control bulls would not be possible without such taboos.

We now need to overcome the taboo and re-learn how to engage in straight talk on investment topics. Each of us can help overcome the Ban on Honest Posting by doing the opposite of the things we did to help enforce the taboo in earlier years. We all need to do all we can to make those expressing doubts about the Passive Investing model feel comfortable doing so. We all need to insist (with good humor) on our right to express our own doubts. At some point, the financial misery brought on by the taboo will become so great that it will no longer be possible for the various communities in which it operates to sustain it. That’s when the real fireworks (the good kind!) begin!

For now, be as forceful as you can be (without ever crossing the line and becoming rude, please — remember that Passive Investors are investors in pain). My hope is that the calculator will help. It is hard even for the most emotional investor to ignore numbers that argue against the viability of his strategies. My belief is that we should always combine a firm honesty about the numbers and about the realities with an understanding that a strong commitment to charity is essential when dealing with such delicate matters and when trying to take things to a good place.

Question #6 on the New Investment Strategy Calculator — A Lot of What You Are Saying Here Seems Mighty Strange — No?


Take it up with the humans. They are at times an exceedingly strange group of individuals.

Alernate Investment Strategies The other side of the story is that, just when you think you cannot trust them to avoid getting into wars and other junk like that, they do something special like invent air conditioning or write a song like “Hey, Jude.”

People are funny.

They are not 100 percent efficient. That one is not even a close call. But people are capable of all sorts of breakthroughs all the same. I have seen some amazingly great stuff from people during my 52 years of walking the valley of tears. I would not count us out just yet, uncorrected Old School Safe Withdrawal Rate Studies or no uncorrected Old School Safe Withdrawal Rate Studies.

Question #7 on the New Investment Strategy Calculator — What Should I Do If the Calculator Looks Too Complicated to Me?

Let it our and let it in. Hey Jude, begin.

You can do this!

It is a little complicated. But I don’t think it will seem so bad if you spend a little time sorting things out. I believe that the potential benefits make it well worth your while to spend a little bit of time with this one.

I have an article on my “To Do” list entitled “Detailed Instructions for Using The Investment Strategy Tester.” Check the bottom of the page where the calculator appears to see if that one is available yet at the time you read these words. If it is, that article might help.

If the detailed instructions article is not yet available, try reading carefully the article that appears below the calculator and that describes the Default Results. If you come to understand what is going on with the Default Results, I think you will know enough to be able to play with the calculator a bit and thereby figure out the rest of what you need to know to perform simple tests of a number of strategies. You do not need to understand all the functions. Some of the stuff is there just in case someone needs it at some point; the average investor doesn’t need to worry about the complicated stuff. Please don’t let your knowledge that there is some complicated stuff that the calculator could be used to check out intimidate you from making use of the functions that are not so complicated.

If you’re still struggling after reading the Default Results article several times, it might help to learn about the earlier three calculators first. Each builds on what we learned from building the one that came before it. Things might come to make more sense if you start at the beginning and gradually work your way forward.

Finally, please feel free to post a question at the blog or to send me an e-mail if you really are stuck. I develop these tools to help people out and it makes me happy to learn that the work I have done is having a positive effect. So it certainly does not bother me to take time to respond to questions from my fellow community members.

Question #8 on the New Investment Strategy Calculator — You’re Not Really Serious When You Say That I Can Make Up for My Losses in the Stock Crash By Switching to Valuation-Informed Indexing, Are You?

I’m serious.

Stock Valuation Calculator

We will all learn a lot more about how investing works once the Passive Investing Era is behind us and we are free to speak plainly and sensibly about what the academic research has been telling us for close to 30 years now. Then the picture will be a good bit clearer. But I don’t see that we should today be shocked and amazed to learn that switching to Rational Investing strategies makes a huge difference.

Consider for a moment what it means that stocks were priced at three times fair value at the top of the bubble. How much of a difference would it make if for years we all bought cars pursuant to a strategy that caused us to pay three times fair value and then we came to our senses? That would be a big deal, wouldn’t it? Why shouldn’t it also be a big deal when we make the switch to investing rationally?

The numbers generated by the calculator are shocking. That’s because we permitted things to get so wildly out of control during the Passive Investing Era. The truly shocking thing is not the numbers generated by the calculator. The truly shocking thing is that so many good and smart people fell for the Passive Investing gibberish.

Question #9 on the New Investment Strategy Calculator — What Other Questions Can Be Examined Using the Calculator?

Here is a small sample of the possibilities:

1) How much difference does it make to the long-term success of a rebalancing strategy if it begins at a time of low valuation or at a time of high valuation?

2) What Valuation-Informed Indexing strategy worked best historically?

3) How much do you improve your odds of having your retirement plan work out by working part-time during the first ten years of retirement and adding the income to your portfolio balance?

4) How much does a young investor hurt herself by failing to take valuations into account when setting her stock allocation?

5) Is it fair to refer to stocks as a “risky” asset class at times when prices are reasonable?

6) Does it work well enough to limit allocation changes to times when prices go to truly insane levels?

Stock Market Strategy

Start playing with the calculator! You’ll come up with lots of good stuff!

Question #10 on the New Investment Strategy Calculator — Will There be More Rational Investing Calculators?


John and I are now working on one that will be called “The Buy-and-Hold Reality Checker.” We hope to have it available at the two sites by the end of this year.

The purpose of the Reality Checker will be to reveal to investors the real significance of various return patterns seen in the the broad U.S. stock indexes. Under the Passive Investing model, valuation changes are implicitly presumed to have no effect on long-term returns. Thus, investors generally decry price drops as bad news and celebrate price jumps as good news. The Rational Investing Model instead posits that increases in valuation levels cause drops in long-term returns and drops in valuation levels cause increases in long-term returns. Thus, price drops can in some circumstances be good news and price increases can in some circumstances be bad news for long-term investors.

Our hope is that The Reality Checker will help investors readjust their thinking by coming to see through the misimpressions encouraged by the Passive Investing model. The calculator is to serve as a “reality check” for those led by advocacy of the dominant model into viewing all price increases as good news and all price drops as bad news. Tools that spread this message help to stabilize both the stock market and the overall economy because they undercut the emotional tendency for investors to sell stocks when prices are dropping and to buy stocks when prices are rising. The Passive Investing model pushes stock prices to extreme highs and extreme lows. The Reality Checker will moderate price swings by showing investors that news that is good in the short term is bad in the long term and that news that is bad in the short term is good in the long term.