Can we handle the truth about stock investing?

Rob Bennett Contributor
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All of the retirement studies and calculators on the Internet today (with one exception) get the numbers wildly wrong.

That’s shocking. That’s a big story. But wait. It gets worse.

This has been public knowledge since May 2002. Several big-name experts have even publicly (but quietly) acknowledged it.

That’s amazing and frightening. But wait again. It gets still worse yet.

A number of big websites (Fool.com, Morningstar.com, Bogleheads.org, IndexUniverse.com, GetRichSlowly.org) have banned honest posting on the analytical errors made in the retirement studies so that investors who have an interest in learning the realities cannot find out about them.

Holy moly! Something is going on here that is not quite right.

All of what I say here can be verified. I have links.

Dallas Morning News Columnist Scott Burns wrote (at my urging) a column about this in July 2005. He pointed out that, if the retirement studies adjusted their numbers to reflect the effect of stock valuations (the most important factor bearing on retirement success), those who retired in the high valuation years would know that they cannot afford to take nearly as much out of their portfolios each year as they have been told is safe to take out. If that’s so (it is), millions of people are going to suffer failed retirements in days to come because they had confidence in these demonstrably false claims.

Burns told us why this has not been reported on in the big papers. “It is information most people don’t want to hear,” he wrote. They think we don’t want to know the truth! They think we can’t handle the truth!

William Bernstein, author of The Four Pillars of Investing, also knows. Bernstein said in response to an e-mail inquiry that any aspiring retirees thinking of using today’s studies or calculators would be well-advised to “FuhGedaBouDit!” Bernstein promptly notified —


Larry Swedroe, the author of Wise Investing Made Simple, knows too. He once described today’s retirement studies and calculators as the product of “Garbage-In, Garbage-Out” research. Swedroe also promptly made sure that Nobody knew about this and did Nothing to help the at-risk retirees.

The retirement studies aren’t just a wee bit off. John Walter Russell, a researcher who owned the Early-Retirement-Planning-Insights.com website until his death in October 2009, went to the trouble to calculate the numbers properly. He found that a retirement plan that the existing studies and calculators identify as “100 percent safe” has only a one in three chance of surviving 30 years in the event that stocks perform in the future anything at all as they always have in the past.

I have spent the past eight years of my life trying to figure out what is going on. Do you want to know what the trouble is?

There was a time when the academic research seemed to indicate that Buy-and-Hold is the best investing strategy for the middle-class investor. But later research threw this into doubt. At the time this was discovered, The Stock-Selling Industry had already spent millions promoting Buy-and-Hold. The feeling was that there was no need to rush out explanations of how the “experts” had gotten it all terribly wrong.

That was 29 years ago.

I’ve saved the true zinger for last.

Buy-and-Hold teaches that we should never lower our stock allocations, even when prices rise to insanely dangerous levels. Every time stock prices have gone to two times fair value, we have experienced a crash and an economic crisis. We left two times fair value in the dust in the late 1990s. We went to three times fair value, prices well in excess of those that caused the Great Depression.

At the top of the huge bull market, stocks were overpriced to the tune of $12 trillion. Even Vanguard Founder John Bogle, the biggest Buy-and-Hold advocate on the planet, acknowledges that it is an “Iron Law” of stock investing that stock prices revert to the mean after they have risen to insanely high levels. So those who follow the academic literature knew in 2000 that sometime over the next 10 years or so we were going to see $12 trillion of consumer spending disappear from our economy.

Congress has formed a commission to identify the true cause of the economic crisis. I have a funny feeling that the primary cause is something other than the stuff that most people have been talking about since September 2008. I believe we need to launch a national debate on the failure of the Buy-and-Hold Model, on how promotion of Buy-and-Hold led to the economic crisis, and on what we today know (but aren’t yet telling!) about what really works in stock investing.

I can handle the truth. What I cannot handle is another stock crash and a deepening of the economic crisis.

Rob Bennett recently wrote a Google Knol titled “The Bull Market Caused the Economic Crisis.” His bio is here.