What We Know That Just Ain't So - J.E. Wilson Advisors

What We Know That Just Ain’t So

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What We Know That Just Ain't SoThe 2015 movie The Big Short, a comedic drama about the lead up to the 2007 mortgage crisis, opens with a epigraph attributed to Mark Twain: “It ain’t what you know that gets you in trouble, it’s what you know that just ain’t so.” While there is scant evidence of Twain ever saying, much less writing these words, they have a certain ring of truth, particularly concerning money and markets.

All of us think we know things that are absolutely true. Some of these beliefs can take many years to unravel after evidence brings into question their veracity.

One of the core principles of our practice is to constantly question long-held truths. This healthy skepticism is the foundation for innovation. Let’s look at a few formerly held truths that have failed to fully live up to the billing.

3 “Truths” That Just Ain’t So

1- Real estate always appreciates.

The narrative around real estate is that prices have moved steadily higher ever since the Pilgrims arrived. Well, the data doesn’t support that belief. Indeed, there have been long spans of well-above inflation appreciation. There have also been just as many years with the opposite result.

Real estate has usefulness, what economists call utility, but generally falls short of rendering the above-inflation returns imagined. One reason for the dissonance is that real estate prices aren’t accessible every day on our mobile devices like the investments in our portfolios. Many continue to believe what they want to believe in spite of the data.

2- Save 10% of your earnings to secure your future.

This one still is widely held, but it is mostly false for high-income earners. Empirical research shows that those with higher incomes need a far higher percentage of savings in order to maintain their lifestyles throughout retirement.

The 10% rule of thumb possibly was true in the era where most individuals had traditional pensions. But for most, those days are in the past. This, along with increasing life spans, commands much higher savings rates than were true previously.

3- The 4% rule for retirement distributions.

This dates back to a research study in the 1990’s from three professors at Trinity University in Texas (one of whom, Phillip L. Cooley was at USC in the 70’s and 80’s). The idea was to solve for a sustainable withdrawal rate in different types of market conditions.

It morphed into a rule of thumb that is somewhat disconnected from economic reality. We have a good deal of empirical data that often support higher overall withdrawal rates, assuming retirees are willing to adjust to actual investment return patterns.

Rigorous research based on observed evidence has helped us understand changes in these and other long-held “truths.” What we know today will change in the future. That’s why planning is most effective on a long-term, not episodic, basis. Ready for a real conversation?

One response to “What We Know That Just Ain’t So”

  1. […] not negative on residential real estate at all, but the investment aspects are mostly overstated. My wife and I have owned our home for 31 years and based on rough market value estimates, the […]

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