A few hundred years ago the world contained a number of venesectionists or blood-letters that believed most illnesses could be cured by determining the correct amount of blood that could be withdrawn from the patient without killing him. Even though the practice was effectively disproved in the early 17th century when it was scientifically shown that the underlying concept was incorrect, practitioners continued blood-letting for another three centuries.
The financial world today still has its own type of alchemists and venesectionists. The financial alchemists tend to misuse something called the Monte Carlo Method which they believe to be a kind of philosopher’s stone. The Monte Carlo Method simply uses a math formula over and over again containing historical data to see how often certain investment returns occurred. It is a good way to see what happened in the past. Unfortunately, these financial alchemists believe the method also gives them second sight and the ability to see into the future, but it doesn’t. The Monte Carlo Method did not predict the stock market would fall for 2000, 2001 and 2002 because, in the past, the market had never fallen three consecutive years in a row. The Monte Carlo Method did not predict that certificate of deposit rates would drop over 90% in five years, because rates had never done that before. The Monte Carlo Method does a very poor job of seeing extreme events – those that should most concern the typical person – and yet these alchemists often refuse to look out their window to see that a real hurricane is raging because their model says the skies should be calm.
When it comes to retirement these alchemists often attempt to perform a type of financial venesection by determining the amount of money that can be withdrawn from the financial blood without taking too much and killing the retiree. The problems with this approach are twofold. The first is the amount of “blood-letting” is largely determined by the alchemist’s blind faith in their flawed interpretation of Monte Carlo Model results – this is why their advice on how much can be safely withdrawn has varied so much over the years. The second problem is there is no need to gamble one’s retirement in the first place because there are annuities that can provide a steady income that is never exhausted and thus never kills the patient.
Neither the alchemists nor venesectionists of the past were bad people, they were merely people so blinded by their beliefs that they ignored reality. Unfortunately, today’s world has many financial alchemists that give advice solely based on the faith that their models must be right. In fairness, often the stars align and the advice does not harm the patient, but it does not mean these alchemists have found the philosopher’s stone.