The Experts Speak on the Risks of Holding Overvalued Stocks in Retirement

Ed Easterling (author of Unexpected Returns) Speaks on the Risks of Holding Overvalued Stocks in Retirement

“The implication for today’s investor is that the likelihood of financial success in retirement is considerably less than most pundits are advocating. Twenty years from now, if the response is ‘who knew’”, it won’t be much comfort for retirees in the employment line at Wal-Mart. This is especially true since a rational understanding of history and the drivers of longer-term stock market returns can help today’s retiree to avoid that ‘surprise.’ I assure you that these are not fear-driven statements, but rather insights that are based upon history and the financial principle that valuation is a major determinant of future returns.” — Article at InvestorsInsight.com, “Destitute at 80: Retiring in Secular Cycles,” February 12, 2007

Stocks in Retirement

Peter Ponzo (publisher of the Gummy-Stuff.org web site) Speaks on the Risks of Holding Overvalued Stocks in Retirement

“Forget the 4 percent rule…. Do not expect to withdrawal 4 percent after retirement [in a retirement begun at a time of high valuation] except by accident.” — Post to the RetireEarlyHomePage.com discussion board, October 2005

John Bogle (author of Common Sense on Mutual Funds) Speaks on the Risks of Holding Overvalued Stocks in Retirement

“In the long run, stock returns depend almost entirely on the reality of the investment returns earned by business. Momentary investor perception, reflected in speculative return, proves to be an illusion that counts for little. Put another way, it is economics that controls long-term equity returns; emotions, so dominant in the short-term, dissolve.” — Speech Entitled “What’s Ahead for Stocks and Bonds,” May 2006

Rob Arnott (Editor of the Financial Analysts Journal)

“The implications of a negative risk premium [for equities] are far-reaching and profound. Perhaps the most important issue is that actuarial return assumptions in pension funding today may be too aggressive.” — Article in the Journal of Portfolio Management entitled “Death of the Risk Premium,” Spring 2001

Scott Burns (personal finance columnist for the Dallas Morning News) Speaks on the Increased Risks of Holding Stocks in Retirement

“While most of the research says any retiree can safely start with a withdrawal rate of 4 percent to 5 percent a year, a newer school of thought believes the safe withdrawal rate depends on how stocks are priced at the time you start making withdrawals…. If stocks were expensive and selling at a high multiple of earnings and offering low dividend yields, history shows that a higher withdrawal rate can be fatal to your nest egg.” — Column dated December 14, 2006

“The established safe-withdrawal-rate rules of thumb are based on long periods of time in which yields were higher than they are today and stock valuations were lower. A growing school of thought believes future withdrawal rates should be reduced to reflect expected lower future returns. This would knock another 1.5 to 2 percentage points off the safe withdrawal rate. You don’t hear much about this because it is information most people don’t want to hear.” — Column dated June 6, 2005.

William Bernstein (author of The Four Pillars of Investing) Speaks on the Increased Risks of Holding Stocks in Retirement

“A particularly bad returns sequence can reduce your safe withdrawal amount by as much as 2 percent below the long-term return of stocks. Recall from Chapter Two that it’s likely that future real stock returns will be in the 3.5 percent range, which means that current retirees may not be entirely safe withdrawing more than 2 percent of the real starting values of their portfolios per year.” — The Four Pillars of Investing, Page 234

Are Stocks Too Risky for Retirement Portfolio
Asked in an e-mail whether it is prudent for aspiring retirees to place their trust in the findings of the Old School safe withdrawal rate studies in planning retirements beginning at today’s valuations, Bernstein offered a blunt, one-word, New Yorkerese response — “FuhGedDaBouDit!”

Phil DeMuth (co-author [with Ben Stein] of Yes, You Can Time the Market!) Speaks on the Risks of Holding Overvalued Stocks in Retirement

“It sounds like the new SWR people say valuations matter, and of course I completely agree, having written with Ben a book on the subject.” — Post to the Vanguard Diehards discussion board, December 16, 2006.

“Raddr” (owner of the raddr-pages.com discussion boards) Speaks on the Increased Risks of Holding Stocks in Retirement

“The whole point of this exercise was to show what would’ve happened if someone had taken the advice that was prevalent around the start of 2000 and that was that 4 percent was a “safe” percentage, even for early retirees. We know better now, of course.” — Post to the discussion board at Raddr-Pages.com, February 1, 2006

Larry Swedroe (author of What Wall Street Doesn’t Want You to Know) Speaks on the Increased Risks of Holding Stocks in Retirement

“Putting in historic returns in my opinion ensures you have garbage in and garbage out…. So if you rely on the Trinity study [an Old School SWR study] in my opinion that is garbage in and garbage out for the two reasons mentioned above–though the big problem is not the order but the overly optimistic returns.” — Post to Vanguard Diehards board, November 16, 2005

Jonathan Clements (author of the “Getting Going” Column in The Wall Street Journal) Speaks on the Increased Risks of Holding Stocks in Retirement

“You might limit your initial portfolio withdrawal rate to just 3% or 4%, equal to $3,000 or $4,000 for every $100,000 saved. This is well below the 5% and 6% withdrawal rates that used to be advocated and reflects, in part, a concern about today’s lofty stock valuations and low after-inflation bond yields.” — Column dated January 17, 2006

Retirement Planning Strategies

In response to an e-mail asking why he has included links in his columns to the findings of Old School studies even after their grave flaws had become publicly acknowledged by a good number of the best-informed investing analysts, Clements acknowledged that the old studies are “not the last word” in safe withdrawal rate analysis.

The Wall Street Journal Speaks on the Increased Risks of Holding Stocks in Retirement

“Some planners say 3 percent is a safer figure these days, given that market returns in coming years are expected to hover in the single digit range.” — Article published in December 2005

Robert Powell (Editor of Retirement Weekly) Speaks on the Increased Risks of Holding Stocks in Retirement

”It’s likely the stock and bond markets will return far less than the historical averages over the next few years. And that could spell trouble for retirees who spend more than 3% from their investment accounts earmarked for retirement spending.” — Article published on MarketWatch.com entitled: “The Number?: New Thinking on Nest-Egg Withdrawals in Retirement,” April 20, 2006

Andrew Smithers (co-author of Valuing Wall Street) Speaks on the Risks of Holding Overvalued Stocks in Retirement

“News of the demise of the random walk has only very slowly spread outside of the economics profession, in part because its overthrow came as a considerable shock to many economists. Nonetheless, if the random walk hypothesis were correct, then the most likely return on equity investment in the future would simply be its historic average return [the Old School SWR studies assume a random walk]. The evidence, however, is strongly against this and points to valuation indicators being mean reverting [New School SWR studies assume mean reversion], with the usual result that after a period of high returns, when reliable valuation criteria are at historic highs, investors must expect poor returns (and, of course, vice versa). — Interview entitled “The Coming Revolution,” published at welling.weedinco.com, April 30, 2004.

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