Wall Street Journal VOICES: David Yeske, On the Science of Financial Advising

Wall Street Journal VOICES: David Yeske, On the Science of Financial Advising

By Thomas Coyle 

David Yeske is a founding principal of Yeske Buie, a wealth management and investment firm with offices in Vienna, Va. and San Francisco. He spoke with WSJ Financial Adviser about taking what he calls a scientific approach to wealth and investment management.

Events of the past two years have got financial advisors stirred up in so many different ways. Just as we heard at the end of the dot-com era, people are now saying that the system is broken and modern portfolio theory is dead.

What people lose track of in all the tumult is that there is a science to financial planning and investing. We do not believe modern portfolio theory is dead, and we believe in incorporating new material only after it’s been empirically validated. Our firm has been able to surf the chaos by adhering to these principles.

So when things started getting tough at the end of 2008, we did some research and discovered an evidence-based method of determining safe withdrawal rates that helped our firm’s clients weather the storm.

In 2006 John Guyton and Bill Klinger wrote an article that described a formula for how to adjust withdrawal rates for a person who needs to dip into his portfolio every year. It had two key rules.

– Capital protection: If over the course of a year the dollar amount of a withdrawal stays the same, but its percentage in relation to the entire account increases by 20% or more, the client should reduce his or her withdrawal by 10% that year. Say, for example, a client makes a 5% withdrawal worth $50,000 in 2008, but in 2009 the same $50,000 is worth 6% of the entire account. He should reduce the year’s withdrawal by $5,000 — 10% of the $50,000 withdrawal — for a new withdrawal of $45,000.

– The prosperity rule: The reverse of the first rule. If the dollar amount of a withdrawal stays the same but its percentage in relation to the entire account decreases by 20% or more, the client can increase his withdrawal by 10% for that year.

Guyton and Klinger plugged this formula into a Monte Carlo simulation program. They ran a massive number of examples using different hypothetical portfolios to determine the effect of the capital protection and prosperity rules over the course of 30 to 40 years. They found that on average using their method, 99% of the original purchasing power of the portfolio was preserved.

The popular saying, “There are lies, damned lies, and statistics,” attributed by Mark Twain to Benjamin Disraeli, raises a smile. But it’s important that people not to throw out the good with the bad just because they feel the need to do something different.

I have confidence, based on sound, fundamental economic reasons, in the resilience of the system. There is no reason to panic.

One client sent me pompoms in the mail and a letter saying, ‘This fits your role as cheerleader. Those messages of confidence you were sending out made me calm so I could stick it out with my plan.