I no longer believe that the safe withdrawal rate is 3 percent or anything close to 3 percent at times of extreme overvaluation. But I wonder how many investors do believe something along those lines. Most investors never have to respond to questions about their beliefs put to them on internet discussion boards So most investors never formulate the thought that the safe withdrawal rate never drops much below 3 percent. But the vast majority of investors accept that Shiller showed that valuations affect long-term returns. So they know on some level of consciousness that the safe withdrawal rate cannot always be 4 percent. I believe that they employ anchoring to persuade themselves that, while the number cannot always be 4 percent, it is probably never too far off from that mark. They tell themselves something that isn’t true and that could hurt them in a very big way because they do not have immediate access to the information they would need to identify the accurate number and because they would feel uncomfortable not filling that gap in their knowledge even if they can only do so by making use of a discredited anchor.
Mark Twain is often credited with the saying that informs us that: “It’s not what you don’t know that hurts you the most, it’s the things that you know for certain that just ain’t so.” It is my sense that a lot of that goes on in the investing realm. We feel that we need to know the answer to every possible question, but we don’t. So we fill in gaps in our knowledge base with the help of cognitive biases like anchoring.
The 4 percent number has persuasive power for me and for millions of others only because it has been repeated so many times that our minds have come to accept it as an anchor that may not be questioned. It is a discredited anchor. It is an anchor that was calculated without making reference to valuation levels. It is an anchor that must be discarded if we are to advance in our understanding of the safe-withdrawal-rate topic.
To think clearly about how stock investing works in the real world, we need to abandon beliefs that we came to accept in the years before Shiller “revolutionized” (his word) the field with his finding that valuations affect long-term returns. If that is so, then we need to question everything we came to believe in the days before the new knowledge became available to us. Anchors are often not helps. They are often crutches that cause us to believe things that simply aren’t so. We need to give up beliefs formed in the past to become free to understand anew the realities of stock investing.
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