For Hocus

Financial Independence/Retire Early -- Learn How!
wanderer
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Post by wanderer »

-W- -

(LOL)

A definitive moment. The two w's have bonded yet again!

you near any of that in Sac? or Sac state (sister to my ugrad institution).

"little dubya"
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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Post by wanderer »

hocus -

i would be greatly pleased if you would grace us with your presence. i am constantly amazed at the eyeballs you draw - i think it's passion and communicating it in some reasonably interesting form that grabs folks.

and, hey, no problem reccing each of your posts! it's a lot easier when i don't have to deal with 7,800 of em.:wink:

w
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
hocus
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Post by hocus »

I think that the REHP will go through the same thing as more and more people suffer busted retirements....I view hocus's efforts to mitigate damages as being quite noble.

That's me--pissed off, but in a noble sort of way (a joke!)

I don't share hocus' "mission," as i understand it. He wants to share these ideas (and great, life giving ideas they are) in a way that reminds me of Joe Dominguez (that is a 110% compliment).

One difference is that I would like to make money from my efforts. Remember, my plan requires that I bring in at least $10,000 a year from my efforts in this regard.

Once my buddies left at the rehp, i was like, "khalas" ("enough" in arabic).

It worked just about the opposite way for me. If you recall, I didn't participate at the REHP board hardly at all for about six months from near the end of 2001 through the beginning of 2002. I was disgusted with the trends in board administration. Then my favorite poster there (Wanderer) got kicked off the board, and I went from being sadly disgusted to being intensely pissed off.

I am constantly amazed at the eyeballs you draw - i think it's passion...

You say passion, they say mental illness. Potato, patato, tomato, tomato....

He has, at least, shortened the delay before people can get accurate information. I think that this board has helped as well.

This board is the final nail in the coffin, for all practical purposes. This stuff I am talking about here, trying to keep the REHP board from falling off a cliff, that is a small detail in the grand scheme of things. But the data that has been brought forward at this board by raddr and JWR1945 closes the book on the approach to safe withdrawal rates taken by intercst. From the point at which that research appeared, no responsible person can ever say again with a straight face that that's the right way to look at things.

FoolMeOnce made a great point in a post he put up at the REHP board shortly before taking his leave. He noted that, as new information comes out, the SWR for high-stock allocations can go down, but it can never go up. That's because the concept requires reference to the worst-case scenario and because the study relies on a form of datamining for its methodology. The consequence is that no one ever again will be able to claim a SWR for high-allocation stocks as big as the one intercst claimed. Each new insights we develop, the lower the SWR for high-allocation stocks goes.

That is not not true for alternate investment classes. Intercst engaged in a lot of funny business in his analysis of fixed-income investments too. So that number will go up as we learn more. And the number for moderate-allocation stocks may go up as we incorporate the effect of valuation (which can pull the SWR up for moderate allocations at some times just as it can pull it down at others).

The most important point that has been made with the research posted at this board is that intercst's claims re the "optimal" stock allocation are way off. Some of the SWR stuff is complicated, so I think it is a good idea at times to pay less attention to the trees and focus on the forest. The "forest"-- the point of all this analysis--is to figure out what stock allocation yields the quickest and safest early retirement. It sure ain't 74 percent stocks. I don't think anyone will want to argue that point after what has been demonstrated in the work we have done here.

The high-water mark for the 74 percent stocks claim was sometime back before discovery of the Bernstein quote. Now confidence in that claim diminishes and diminishes over time the more that people learn about how SWRs work, regardless of any developments in discussion board politics. All the king's men are never going to be able to put that humpty-dumpty "study" back together again.

It was all a con. If you go by what intercst said in response to the Datasnoooper charge (that he knew all along that the study lacked statistical validity), it was all a con from the first time it was put forward. The board politics stuff is only interesting to the extent that it suggests pssibilities for how the people at whom the con was directed are going to go about the process of discovering the gravity of the wrong that was done to them.

But because the SWR is a number--something that is ultimately an objective truth, not something where two people can have legitimate differing opinions--the con cannot continue once a forum is established where interested parties are able to share information in a process aimed at discovering the truth.
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Post by WiseNLucky »

FoolMeOnce made a great point in a post he put up at the REHP board shortly before taking his leave. He noted that, as new information comes out, the SWR for high-stock allocations can go down, but it can never go up. That's because the concept requires reference to the worst-case scenario and because the study relies on a form of datamining for its methodology.


This was great insight on his part.

I have to say that I was never enamored of the Fool's retire early board. There were so many posts, so much heat, and a bunch of off-topic stuff. I am so happy to have many of you here, and to be able to follow and keep up with the discussion.

While I may never be able to retire early (waited too late to start preparing), the things I am learning here may enable me to retire with some comfort and respect.

And there's fun in the learning.

WiseNLucky
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Post by raddr »

hocus,

The "forest"-- the point of all this analysis--is to figure out what stock allocation yields the quickest and safest early retirement. It sure ain't 74 percent stocks. I don't think anyone will want to argue that point after what has been demonstrated in the work we have done here.

I'm not sure I agree with this. Sure, it is silly to backtest/datamine and then put out an exact optimized number like 74% and treat it as dogma. However, I think that for a long term retirement (40 or more years) you've got to have a large equity allocation, assuming you're holding only paper assets (stocks/bonds/cash) as most of us are. My equity allocation is about 70% for example. The important thing is to pay attention to valuations and diversify properly.
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Post by FMO »

hocus writes:

FoolMeOnce made a great point in a post he put up at the REHP board shortly before taking his leave. He noted that, as new information comes out, the SWR for high-stock allocations can go down, but it can never go up. That's because the concept requires reference to the worst-case scenario and because the study relies on a form of datamining for its methodology. The consequence is that no one ever again will be able to claim a SWR for high-allocation stocks as big as the one intercst claimed. Each new insights we develop, the lower the SWR for high-allocation stocks goes.


Here is the link to the post hocus refers to:

http://boards.fool.com/Message.asp?mid= ... t=username
FMO

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Post by hocus »

I think that for a long term retirement (40 or more years) you've got to have a large equity allocation, assuming you're holding only paper assets (stocks/bonds/cash) as most of us are. My equity allocation is about 70% for example. The important thing is to pay attention to valuations and diversify properly.

raddr:

I have two responses.

One, I agree that diversification will in most cases push the safe withdrawal rate up. When I say that no one will ever again claim that 74 percent stocks will yield a SWR of 4 percent, I am referring to 74 percent stocks as recommended in the intercst study. You are proposing something different, diversifying among types of stock purchases to pull the overall SWR for the stock portion of your portfolio up. I don't mean to rule out the possibility that something along those lines might yield a significantly higher SWR than the intercst recommendation.

Two, it's important to understand that you need not apply safe withdrawal rate analysis to your entire portfolio. Let's say that we define "safe" as something that has a 90 percent chance or better of coming true. There is no grand law of the universe that says that you must have a 90 percent chance of your entire portfolio obtaining a 4 percent withdrawal. You could go for a 90 percent chance of obtaining a 4 percent withdrawal on half of your portfolio and be satisfied with a 50 percent chance (a non-"safe" percentage) of obtaining a 4 percent withdrawal on the other half.

Why seek 90 percent safety on half of your portfolio and accept 50 percent non-safety on the other half? Because some of your portfolio finances survival expenses (groceries, heat, a roof over your head) and the rest finances "nice to have" stuff (vacations, new furniture). If you demand 90 percent safety for your entire portfolio, you limit yourself to the asset classes with the highest SWRs, and those tend to be the asset classes with low long-term growth potential. You pay a price for going overboard on your insistence on 90 percent safety.

I believe that what you are getting at when you say "you've got to" have a large equity allocation is that there is a price to be paid for abstaining from high-growth potential assst classes. We don't disagree on this point at all. That's why I say that I believe that most investors should have a 50 percent allocation in stocks, even though stocks generally have a low SWR. The low SWR for stocks is not an argument for avoiding stocks. It's just an information bit that helps you make more informed decisions when trying to balance your need for safety and your need for long-term growth.

If you determine that you want a safe withdrawal rate of 4 percent for half of your portfolio, you might go with 100 percent stocks for the non-safe half and with 30 percent stocks for the safe half. That would give an overall stock allocation of 65 percent. You wouldn't obtain a 4 percent SWR for the stock half of your portfolio, but you wouldn't be counting on a 4 percent SWR for that half of your portfolio, so there would be no problem.

It's helpful to remember that most of the busted retirements that result from "non-safe" stock investing arise in the first five years of retirement. If you put half of your overall portfolio in non-safe stocks, you only have to survive for five years without a worst case scenario turning up, and your overall portfolio (not just the initially safe half) becomes "safe." So it makes sense, in my view, to constuct a portfolio with both safe and non-safe portions.

The beauty of this is that you never take more than a 10 percent risk that you will not have the money you need to cover survival expenses. The only significant risk that you ever accept is a chance that you might run short on what you wanted to have for things like vacations. But five years out, even that portion of your portfolio becomes safe. So even the expenses that you place at 50 percent risk become safely covered not too long into your retirement.

I believe that one of the problems that people have been having with this thing from the beginning is a preconception that you must apply SWR analysis to your entire retirement portfolio. That's why people are hesitant to accept the obvious fact that the SWR for stocks is far less than 4 percent. People are worried that acknowledging the true SWR will require them to delay their retirements by many years. But rather than kidding yourself about the SWR for stocks, I think that the better way to go is to accept that you need not demand 90 percent safety (or 95 percent safety, or 98 percent safety, for whatever) for your entire portfolio.
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Post by raddr »

hocus,

it's important to understand that you need not apply safe withdrawal rate analysis to your entire portfolio

Certainly true.

I believe that what you are getting at when you say "you've got to" have a large equity allocation is that there is a price to be paid for abstaining from high-growth potential assst classes. We don't disagree on this point at all. That's why I say that I believe that most investors should have a 50 percent allocation in stocks, even though stocks generally have a low SWR. The low SWR for stocks is not an argument for avoiding stocks. It's just an information bit that helps you make more informed decisions when trying to balance your need for safety and your need for long-term growth.

I still have a problem with this for very long (>40-50 yr.) retirements. For example, for a 55 yr. retirement the historical SWR for a 100% S&P500 portfolio was 3.5%. For 100% Commercial paper &/or T-bills it was barely 1%. TIPS, of course, should provide a little better return but you don't know what rate you'll be looking at in 30 years when they mature. At the current 2.7% coupon the SWR will likely be less than 2.7% unless you can roll them over at a higher rate in 2032.

Add a little equity diversification and you do even better. Since 1927 (earliest date I have data for) an equal mix of S&P500, ScV, and EAFE would've yielded an SWR of 4.4%.
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Post by hocus »

hocus: Stocks generally have a low SWR.

raddr: I still have a problem with this for very long (>40-50 yr.) retirements..

But, raddr, the SWR for stocks is going to fall the farther out you go. The concept is based on the worst case scenario, and, the farther out you go, the better your prospects of running into a worst case scenario. If the SWR for stocks over 30 years is X, then it is X minus something for 40 years, and x minus something minus something for 50 years.

For a 55 yr. retirement the historical SWR for a 100% S&P500 portfolio was 3.5%. For 100% Commercial paper &/or T-bills it was barely 1%.

I don't accept either of these numbers as being valid. If they are coming from the intercst study, or from some similar study with similar statistical invalidity, then the numbers just aren't right. I think we need to reach a consensus on how to calculate a SWR validly before we start throwing numbers like this around.
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Post by JWR1945 »

In his haste raddr miscalculated the safe withdrawal rate for TIPS:

I still have a problem with this for very long (>40-50 yr.) retirements. For example, for a 55 yr. retirement the historical SWR for a 100% S&P500 portfolio was 3.5%. For 100% Commercial paper &/or T-bills it was barely 1%. TIPS, of course, should provide a little better return but you don't know what rate you'll be looking at in 30 years when they mature. At the current 2.7% coupon the SWR will likely be less than 2.7% unless you can roll them over at a higher rate in 2032.

The correct answer is 3.51% over 55 years assuming that you can still get a 2.7% real return in the future. What raddr overlooked is the return of capital. The final balance is zero when one calculates safe withdrawal rates.

The formula is in my A Free Lunch post, which I have reposted on this board.

Have fun.

John R.
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Post by raddr »

The correct answer is 3.51% over 55 years assuming that you can still get a 2.7% real return in the future. What raddr overlooked is the return of capital. The final balance is zero when one calculates safe withdrawal rates.

Oops :shock:

You're right of course. I forgot to include the capital erosion. The SWR can't be less than the coupon for TIPS/Ibonds. Sorry for the confusion.
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Post by hocus »

The correct answer is 3.51% over 55 years assuming that you can still get a 2.7% real return in the future.

For the record, I do not agree that this is the "correct" answer.

When you put $100,000 of your retirement stash into TIPS, you are employing that portion of your portfolio to obtain one sort of income stream and thereby giving up other sorts of income streams that could be obtained with other sorts of investment classes. To know the safe withdrawal rate for that portion of your assets, you don't need to consider only the TIPS rate being paid today and the TIPS rate being paid 30 years from today. You need to consider the TIPS rate being paid today and the return likely to be provided by TIPS and by all alternative investment classes 30 years from now.

The reason is that there is no law of the universe locking you into TIPS beyond the initial 30-year period. Presumably you are choosing TIPS today because they offer the best combination of growth and safety possible for someone with your life goals and your financial circumstances. That may still be true in 30 years or it may not. The "or it may not" factor pushes up the long-term SWR for the TIPS investment.

How does it do this? By giving you an option at the end of 30 years to move that portion of your portfolio into an investment class with higher growth. Say that you have only earned a 3 percent return on TIPS over the 30 years, but at the end of the 30-year period, stocks are available at a Price/Earnings ratio of 7. It might be a good idea for you to move that $100,000 into stocks at that time because the SWR for stocks with a P/E of 7 is higher than the usual SWR for stocks and perhaps higher than the SWR that will be available from TIPs at that time. By moving that $100,000 into a higher growth asset, you pull your long-term SWR for that portion of your portfolio upward.

The point I am making here may at first seem to be in contradiction to the one made in my immediately preceding post, in which I argued that the SWR can only go down over long time-periods, and not up. But the difference does not come from applying a different logic to the two situations, it comes from applying the same logic to two investment classes with different characteristics.

Stocks possess a "lock in" effect. Because of their volatility, and the difficulty of predicting short-term price changes, there is great risk in following strategies that require you to move money in and out of stocks. So the best way to go with stocks is generally buy and hold. That is not the case with asset classes like TIPS. There is no penalty associated with a decision to move out of an investment class like TIPS when a more appealing investment class comes along (presuming that you do not pull out prior to the term agreed to when making the purchase, of course).

Pull out of TIPs at the end of 30 years, and there is no risk that you are selling at the worst possible time, as there is when you abandon a stock investment. When analyzing the possibility of changes from a TIPS investment, all you need to do is analyze the two possibilities (TIPS and the alternative) and choose the one with the greatest overall appeal at the time the decision is being made.

The option to move out of TIPS and into stocks at the end of 30 years does not materialize at the end of the initial 30-year TIPS committment. It is present from the day at which you make the intiial decision to invest in TIPS. Thus, it must be part of the calculation of the SWR for a TIPS investment. This possibility of moving into a higher-growth investment class at the end of a 30-year time-period is part of the appeal of TIPS. If you ignore this factor in your analysis, you are ignoring an important component of the appeal of the TIPS investment class.

If you are planning a 30-year retirement, the SWR for TIPS can be calculated by looking at the guaranteed real return for the initial TIPS investment, adjusted downward for taxes. But if you are planning a 40-year or 50-year retirement, you must also factor in the possibility that you will be generating a long-term SWR higher than the intiial tax-adjusted real return because in the last 10 or 20 years some or all of that money may be in a high growth investment class providing an acceptable measure of safety.

The reason why the SWRs for stocks can generally not go up over time is that the worst case scenario is a reduction in that portion of your portfolio to zero. If you go to zero in Year 20, you can never recover, the game is over for that portion of your assets. But you can never go to zero with TIPS so long as you do not take out each year more than the real return they provide--TIPs, unlike stocks, provide a guaranteed positive return. So you are going to have something left at the end of 30 years no matter what.

That something may not be enough to justify an acceptable SWR at the end of 30 years, but the possibility is available to you to turn that something into a far greater something through investment in high-growth investment classes at that time. It may or may not be possible by year 40 or year 50 to get the overall SWR for that portion of your money up to an acceptable level.

To know the true SWR for a TIPs investment, you need to determine the prospects of this happening. SWR analysis is a percentages game. If you determine that the odds of this good thing happening are strong, that will increase your TIPs SWR by more than if you determine that the odds of this good thing happening are not so strong.

The point for now is that even a small possibility that this good thing will happen is worth something. If you are determining a SWR for a period of longer than 30 years, you must factor it in in some manner as it is one of the positive characteristics of the TIPs investment class. Ignore it and you are skewing the analysis in favor of investment classes that do not possess this positive feature.
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Post by wanderer »

This was great insight on his part.

I have to say that I was never enamored of the Fool's retire early board. There were so many posts, so much heat, and a bunch of off-topic stuff. I am so happy to have many of you here, and to be able to follow and keep up with the discussion.

While I may never be able to retire early (waited too late to start preparing), the things I am learning here may enable me to retire with some comfort and respect.

i'm biased but i am really happy ur here WnL. Nice to have a fellow acct/cpa/big 5/6er. it's nice to hear from one considered outside the "cabal" that many of our perceptions have been validated.

in terms of what's going on here that is significant:

1. people actually admit they are W-R-O-N-G. A novel concept.

2. the division of he port/capturing the gain/VA appears to hold promise.

3. taking account of variability in income needs (nod to dory, but we did that in our planning, as well, without incorporating shiller data the way he backtests it; course i'd appreciate a nod from him on the FIRE acronym...:wink:).

4. alternative asset classes being explored/simulated etc. asynchronicity is apparently a remarkably muscular feature.

5. update on asset allocations - remarkable steadiness in terms of apportionment, imo.

6. acknowledgement of probable lower SWR going forward using the simplistic, unitary approach.

7. as multiplier effect of lower SWRs work their way into our consciousness, overseas retirement appears to offer tremendous potential for the adventurous among us.

8. etc.

have we really had a political post yet? mebbe a couple... is there really any comparison?

wanderer
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wanderer

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Post by hocus »

Is there really any comparison?

Wanderer:

I agree with your eight points, and I agree that there is no comparison in terms of quality of content.

But take a look at this poll from the TMF Mechanical Investing board.

http://boards.fool.com/Message.asp?mid=18321936

The topic of Mechanical Investing is similar to the topic of Early Retirement in that it is a niche personal finance topic. This poll shows that the vast majority of the community that congregates at the MI board is there not because they went looking for it but because they happened to be at the Motley Fool site, and, when they heard something about mechancical investing, they checked it out and got hooked.

You note in your post that you are glad to see posts from WiseNLucky because he is not part of the usual "cabal" that posts here. You are right that it is healthy to hear fresh voices from time to time. But how are we going to attract enough fresh blood to this board without the TMF community-generation engine to help us?

The "problem," at this board, if you want to go looking for one, is that we have too many chiefs and not enough indians. You know an awful lot more about FIRE and investing than the average person, wanderer. So does JWR1945, so does raddr, so does FoolMeOnce, so do I. We need to have our ideas questioned by people who are new to this stuff, people who are not going to "buy in" to what we say as soon as we start to get the words out but are going to ask questions that don't naturally occur to people as steeped in this stuff as are most of us who post here.

How are we going to attract such people to this board?

Some will come just by chance, and that's nice. But I think we need more than that to realize our potential. Motley Fool spends lots of money pulling lots of eyeballs to its discussion boards. Why should we not take a few steps that would allow us to turn a few of those sets of eyeballs to our own advantage?

The names I mentioned above all played a significant role in building up the REHP board. Why should this group walk away from the REHP board with nothing to show for thousands of person hours of post-crafting when we can realize a big return on our investment just by walking over there, asking that the TMF rules be followed, and then letting people know that there is a second FIRE board that would like to advance knowledge of the subject matter in combined effort with that one?

I'll take a break from making my pitch with this post because I probably am testing some people's patience. But the more I think about it, the more I think it is the wrong thing to do to allow the intercsts of the world to take all the fruits of the labor of scores of other posters who play by the rules.

What is it that we are paying for when we pay Motley Fool $30? Bandwidth, to some extent. But the most important thing we are paying for is enforcement of the posting rules. That's the special something that they add to the mix, that's what justifies the fee, that's what they advertise when they try to entice people to sign up--the promise that the TMF boards will be a different experience than some other places on the web where flame wars are permitted.

So, personally, I intend to ask that the $30 of value that I paid for be provided to me. The more I think about this, the less inclined I am to let one member of that community take advantage of all the work that I and scores of others put into building up that community. It does not belong to intercst. It belongs to wanderer, and FoolMeOnce, and raddr and JWR1945, and on and on, and we should make full use of the asset we developed in the past in our efforts to build up the value of a new resource we are now developing for the future (this board).
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Post by WiseNLucky »

You note in your post that you are glad to see posts from WiseNLucky because he is not part of the usual "cabal" that posts here. You are right that it is healthy to hear fresh voices from time to time. But how are we going to attract enough fresh blood to this board without the TMF community-generation engine to help us?


Is TMF still attracting fresh voices now that it has imposed the fee? And will that continue once the free period runs out for heavy posters?

I know I spent a lot of time over there before the fee was imposed and am grateful to have found the concept of index investing. I was (am?) the consumate lurker -- soaking up the wisdom of others.

I left when ES set up the MSN Index board and was quite happy to see a forum where obvious trolls were kept at bay. I like that here too and significantly prefer this setup to MSN. But you are right -- attracting new posters to this site will be difficult.

Perhaps the best we can hope for is to keep this place a haven for you TMFers to come and lick your wounds and to have you invite promising newbies in for a test drive. I know I have little interest in going back over there but appreciate the insight you bring back.

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Post by ElSupremo »

Greetings WiseNLucky :)
But you are right -- attracting new posters to this site will be difficult.


I have to disagree with you folks on this one. We have several new members since the move from MSN. I've received several emails from folks who like the boards but are just lurking for now. Once we hit the search engines you all may long for these quieter days. :wink:
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ataloss
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Post by ataloss »

Is TMF still attracting fresh voices now that it has imposed the fee? And will that continue once the free period runs out for heavy posters?


They will find out after 2/14. It would be interesting to see how many get free membership for the next year. (I am sure I won't be included this time)
Have fun.

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Post by ElSupremo »

Greetings ataloss :)
It would be interesting to see how many get free membership for the next year. (I am sure I won't be included this time)


Since I haven't posted since then I doubt I'll get one either. Heartbreaking. :P
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Post by hocus »

Is TMF still attracting fresh voices now that it has imposed the fee?

WiseNLucky:

I am planning a post at the Motley Fool's Retire Early board (for sometime near the one-year anniversary of introduction of the fee) in which I will make the case that the fee is a good thing for the growth of the Motley Fool boards.

It is my contention that payment of a fee causes the formation of a binding agreement between the company hosting the site and the user of the site paying the fee. Motley Fool has always attracted people to its discussion boards with the claim that the debate there is more civil and reasoned than what you find at many other sites. But now they are not just saying this, they are collecting money from large numbers of people as a result of this claim. I believe that they are now bound to administer their posting rules, rules which do not permit the sort of posting practices you see regularly at the REHP board.

I believe that it is the $30 fee that is going to save that board. It's clear that large numbers on the board are sick of the nonsense. Just yesterday there was a poll in which 48 community members (at most recent count) expressed the view that "this board has gone to hell!" Not exactly a vote of confidence in the current leadership.

The problem that is frustrating the desire of these 48 community members for a board with reasoned debate is one of motivating Motley Fool to administer its posting rules in a reasonable manner. I believe that the existence of the fee may turn out to be a help in this regard. If paying $30 a year means that we get the resource that the old REHP board was for so many of us, I think that we will ultimately come to view that fee as a small price to pay indeed.

Which is not to say that it is not also a big plus to have available to us a no-fee board like this one. Let a thousands flowers bloom, I say. The knowledge shared at this board will enhance the learning experience at the TMF one, and the knowledge shared at the TMF one will enhance the learning experience here. Both boards will be more powerful tools for aspiring early retirees as a result. We have a few unpleasant little chores we need to address ourselves to first, of course.
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