Who are you going to trust: Barry Ritholtz or Jim Cramer? – Money sense

The first can be considered a must-read by retirees and those about to retire: William Bengen’s A richer pensionthe long-awaited update of his classic book on the much-quoted 4% rule: Maintaining client portfolios during retirement. That book was first published in 2006 and was originally aimed at financial advisors, but became popular with the general investing public after receiving extensive press coverage over the years.

The 4% rule—which is actually closer to a 4.7% rule, depending on how you interpret it—refers to the “safe” percentage of a portfolio that retirees can withdraw each year without running out of money in thirty years, net of inflation. Bengen’s term for this is ‘SAFEMAX’.

The new book is probably aimed at average investors. Still, I found it quite technical, packed with charts and tables that are probably more accessible to its original audience of financial professionals. Including some useful appendices, the book is just under 250 pages.

After going through all of Bengen’s adjustments designed to minimize the impact of inflation, bear markets, and unexpected longevity, I was left with the impression that the original 4% rule remains a fairly good initial estimate for what retirees can safely withdraw in a given year.

Sure, 3.5% or 3% may be technically “safer,” especially if you expect to live a very long life or want to leave an estate to your heirs. I’ve even seen arguments that a 2% pension rule may be suitable for extremely risk-averse retirees.

On the other hand, pulling back 6%, 7% or more is not that dangerous as long as the stock markets and interest rates work together. That is what many retirees intuitively do anyway; they reduce withdrawals in bear markets, and spend a little in raging bull markets.

It’s also worth noting that whether you choose 3%, 5%, or higher percentages, this guideline really only applies to your investment portfolios, whether they are in tax-deferred or tax-free accounts or taxable accounts. Most Canadian retirees can also count on the Canada Pension Plan (CPP) and Old Age Security (OAS), not to mention employer pensions. Those who do not have large defined benefit pensions, but have a lot saved in RRSPs and TFSAs, may choose to retire or partially retire their savings by purchasing annuities. (For timing, see this piece recently published on my blog.) For that concept, consult Professor Moshe Milevsky’s excellent book, Retire your nest egg.

Make money in any market

More controversial is Jim Cramer’s How to Make Money in Any Market. I know it is fashionable for some mainstream financial journalists to discredit the old anchor Crazy money and in-house stock selection guru Screaming on the street. I never watch him on TV (MSNBC), but often listen to his podcasts while walking or at the gym, usually at 1.5x speed and skipping interviews with the CEOs of more speculative stocks in which I have no interest. Cramer’s critics are mostly die-hard indexers who swear that it’s impossible to consistently pick stocks and “beat” the market over the long term. I tend to side with them, but more on that below.

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Clearly Cramer wants to differ, often with testimonials from Nvidia millionaires who bought those spectacular artificial intelligence (AI) chips at the same time he named his dog after them (sadly now deceased). Cramer devotes an entire chapter to that call, which he mentions at every opportunity. I bought those shares too, even though I was too late and risk-averse to bet on the farm enough to change my life with it.

What his critics may not realize is that even Cramer believes in indexing at least 50% of a portfolio. In fact, he tells newcomers to the stock market that their first $10,000 (US) should go into an S&P500 index fund. Hard to argue with that.

Where I part ways is his book’s recommendation to hold just five stocks for the 50% of a portfolio that is not indexed. That would mean holding about 10% of your total portfolio in each of these stocks, which is much more concentrated than most investors would accept. Much of the book is about choosing the kind of secular growth stocks he prefers, using modern AI tools like ChatGPT, Grok and all the rest.

I always wondered about the regular segment of his show, Am I Diversified?, where readers submit their five choices for Cramer’s consideration. I would be surprised if there was an investor out there whose portfolio is so concentrated. Even Cramer’s oft-cited Charitable Trust owns far more than five stocks.

How not invest

This brings me to the third book I recently ordered from Amazon assessed by Michael J. Wiener of the Michael James on money blog: Barry Ritholtz’s book How not to invest. Cramer cynics might say this would have been a better title How to make money in any market if it had not already been taken by Ritholtz; After all, Cramer famously inspired a number of ETF companies to offer “reverse Cramer” funds that fall short of his big long recommendations.

Ritholtz’s book is almost 500 pages, but is quite readable. It has generated multiple testimonials ranging from William Bernstein (“Destined to become a classic.”) to David Booth of DFA, Shark tank‘s Mark Cuban and author Morgan Housel, known from The Motley Fool, and who wrote the foreword.

Ritholtz divides his book into four parts: bad ideas, bad grades, bad behavior and good advice. While Cramer tempts us into individual stock picking, Ritholtz reminds us that few do it well; nor can most of us successfully achieve market timing. He pays a lot of attention to the poor outcome of some experts’ predictions in the past. I gained a newfound appreciation for the benefits of indexing, especially for the core of portfolios, if not for the whole. As he puts it: “Index (mostly). Own a wide range of cheap stock indices for the best long-term results.” He lists five benefits of indexing: lower costs and taxes, you own all the winners, better long-term performance, simplicity and less bad behavior.

Fortunately, regular investors have many advantages over the pros, such as not having to benchmark against indices or worry about investors selling a fund, the ability to keep costs low and, in theory, a much longer time horizon. But the clincher is that “indexing gives you a better chance of being ‘less stupid’.”