Common Sense Is Allowed

Two points that have been made here repeatedly resurfaced elsewhere in the last day or two and are worth repeating.

First was an article from theStreet rerun on Yahoo Finance that took on the 4% retirement withdrawal rule. The article cited a study from T Rowe Price that says instead of starting at 4% your first year and then increasing by the rate of inflation that instead less should be taken out during a bear market.

As I read through I gravitated to whatever you got, 4% (more correctly 1% per quarter) which is something I've been writing about for years. It makes no sense to me to start taking $30,000 out of a $750,000 portfolio and then somehow take $30,900 out the following year from a portfolio that shrunk to $680,000 in a down year. A withdrawal rate anchored to some highwater mark combined with a large drop in the market (and presumably the equity portion of a diversified portfolio) would seem like an obvious path to a financial plan-rewrite.

I view this as more of a common sense issue more than anything else. Typical financial planning is important in terms of understanding probabilities and if probabilities and reality end up converging then there should be fewer things to worry about but people cannot ignore when probabilities and reality diverge. A $50,000 withdrawal rate from a portfolio that would seem to allow for only a $40,000 withdrawal has a very high likelihood of leading to serious problems as a matter of common sense.

Denial plays a large role here of course but if reality diverges from the plan in a negative way then something will have to give. If you've got $800,000 then the 4% rule allows for $32,000, if it drops to $700,000 then 4% calls for $28,000. Simple as that.

The other issue is the latest round of US and European bank stock implosions and the lingering of sovereign credit problems. Prices general got hit very hard yesterday and Sean Jones from Egan Jones was all over the place scaring everyone about everywhere.

As I mentioned the other day jobs and housing in the US show no meaningful signs of turning around. Europe is having what looks like a very slow moving contagion on the back of all sorts of fundamental problems. It seems only logical that financial companies would face serious problems against that backdrop. Expectations for the worst crisis in 80 years to wrap up neat and tidy in a year or two (from 2008) have always baffled me.

In terms of simply wanting to avoid the market's worst problems the amount of work to be done here is minimal. For someone who needs to be exactly correct, maybe for shorter term trading purposes, then obviously the work is much greater but for most market participants figuring out what to avoid will go a long way toward long term success in pursuit of the goal of having enough when you need it.

That certain segments of the market are going to have fundamental problems for a long time to come seems like a matter of common sense. I'm sure someone will buy UniCredit at €1.08 and get a great trade but the fundies are a long way from being healthy.

There are plenty of investment destinations not facing their worst financial crisis in 80 years. They may go down in some sort of sympathy in the short run of course but when we look back on this decade in 2020 it will be these markets that had "normal" or better than "normal" decades.