Young adults should buy stocks; mature adults should favor bonds. Or so we’re taught. It makes intuitive sense. Young people have modest savings and lots of time to recover losses from any bear markets. People approaching retirement have more to lose and less time to recover from bear markets. Typically, they want greater certainty as to how much they can safely spend in retirement and less risk that a decline in the value of their investments will demolish their retirement plans.
This type of logic has spawned a huge retirement planning industry, with a wide array of target-date strategies whose Glidepath mechanisms systematically ramp down portfolio risk as an investor approaches retirement. These products are, for many people, the default option in their 401(k) and other defined contribution pension portfolios. Shockingly, the basic premise upon which these billions are invested is flawed.