Doubtless we've all read countless opinions on how to adjust our asset allocation as we age. In the spirit of sharing something entirely different on this topic, here is a quote from the Updated and Revised 2013 edition of Prof. Moshe Milevsky's book Are You A Stock or a Bond?
(It's a great book):
Moshe Milvsky wrote:First of all, the age-old general rule that you should allocate your numerical age value to bonds - or 100 minus your age value to stocks - is somewhat meaningless at best, and wrong at worst. Even if you revise the number from 100 to 110 or 120 it certainly doesn't capture the essence or risk classification of your job. For some occupations and time points in your life the optimal allocation to equities might be greater that 100 minus age, and in other cases it might be lower. Your age value doesn't contain enough information to determine a suitable asset allocation. (page 100)
Prof. Milevsky presents the following numerical example (data taken from the publication Portfolio Choice and Mortality-Contingent Claims: The General HARA Case
by Huang Huaxiong and Moshe Milevsky):
Current Annual Income: $100,000 per year
Tenured Professor: 280% equity allocation (leveraged!)
Bankruptcy Lawyer: 170% equity allocation (leveraged!)
Mechanical Engineer: 125% equity allocation (leveraged!)
Investment Banker: 60% equity allocation
Prof. Milevsky practices what he preaches! As a tenured professor of finance at York University (Toronto), he has a 200% equity allocation (i.e. he's leveraged 2 to 1).All this certainly presents a new way of thinking about pre-retirement asset allcoations, doesn't it!
Investment skill is often just luck in sheep's clothing.