Behavioral finance
Great point. It goes to show that the best plans on paper are only good as the emotional resolve to follow them.
The 4% rate was tested to weather the Depression of the 1930s and the low-growth, inflationary 1970s. So if someone believed in 4% on that basis, I would submit that they have to be convincing themselves that this will be worse than BOTH of those events in order to justify dropping the rate if they believed it survived those previous lousy markets. Either that or they are discovering that fear trumps reason.
IMO, it's a perfect example of emotions like greed and fear clouding rational thinking.
If nothing else, the 4% theory is being shown as just another general truism that people abandon in bad and uncertain times -- *exactly* the kind of times that number was created to survive.
I agree with this post. The subconscious mind (according to the book
Think and Grow Rich) overrides rational thought when one is "losing money" and the emotional response is to sell no matter how low the price (which is otherwise known as "capitulation"). But through autosuggestion and preparation, one can condition one's subconscious mind to behave differently when under fire from a declining market (or under temptation from a rising market).
That is why value investors are taught to stay within their circle of competence and to know what the value is of the fractional ownership interests in the wonderful businesses (i.e., securities) they are buying. They will be able to tell the difference between a "falling knife" and "fallen angel" and have the confidence to react accordingly (i.e., stay away from a falling knife and consider buying more of a fallen angel if appropriate in terms of one's overall portfolio).
Another aspect of one's reaction to market conditions is one's liquidity situation. Money needed within the next five years for living expenses should not be in the stock market because the market can be down for long periods of time. If one needs to cash out investments within the next few weeks or months to pay living expenses and the market is way down, that is extra stress one can do without (i.e., it's easier to sleep well when you don't need to sell any of your securities for another five years when the market is tanking).
All of this takes planning ahead of time. Think through various market scenarios and write down how you would want to react. Everyone thinks they will be able to buy low if the market tanks (because they want to "buy at the bottom") and be able to sell right before the peak of the bubble (because they want to "sell at the top"). This is much easier said than done, but mentally rehearsing one's responses to various scenarios takes some of the emotion out of the situation when the actual situation happens.
Also, think of this market condition as a dress rehearsal for its next occurrence. While every bear market is different, they do have one thing in common -- the ability to cause investors to make serious mistakes that are driven by emotional reactions to financially stessful situations. But you can condition yourself to be Mr. Spock cool (or Mr. Buffett cool) to these kinds of situations and take advantage of them by being on the other side of the transactions of those people who are capitulating due to their emotions.
