I've come across that piece before and glad I am revisiting it. So if it's true that there is in fact no time diversification, and in fact this is one of the most pervasive things being told across all forms of media: that young investors should be more into equity than elderly investors.
If that is actually a fallacy, as Norstad argues. Then what is the practical, real-world decision that would impact actual real world portfolios? Should we go 50/50 then?
As a young investor who currently subscribes to the mantra of being aggressive in equity when I am young...this is quite concerning. Should I change my IPS and dramatically reduce my equity???
Consider this chart from a previous post.
Suppose you plan to retire at age 67 when your human capital is fully expended. For retirement income to pay your monthly bills for the rest of your life, you plan to liquidate your portfolio at age 67 and purchase an inflation-adjusted annuity.
To state the obvious, at age 67, you must be 100% cash immediately before purchasing the annuity.
But 30 and 20 years before, it would make sense to have 100% stocks, since there is 90-99 percent chance stocks will beat bonds.
The start and end points are known. The middle is the tricky part.
The question is: What mix of assets to hold between 20 years and 0 years before retirement?
By 10 years before retirement, there is a 20% chance bonds will beat stocks. 100% stock probably no longer makes sense.
5 years before retirement, there is a 30% chance bonds beat stocks.
1 year before retirement there is a 40% chance bonds beat stocks. Mostly 1-year Treasury now makes more sense.
Somehow, between 20 years and 0 years before retirement, you want to go from 100% stock to 100% cash.
I don't know what the optimum way to make the switch from stocks to bonds to cash. Maybe some kind of glide path where you gradually add Treasury bonds?
For example, maybe 20 years before retirement you sell 5% of the stock and buy 20-year Treasuries that will mature at age 67 when you actually need the cash to purchase the annuity.
19 years before retirement, sell another fraction of the stock and buy 19-year Treasury.
Continue every year selling some stock and buying Treasuries that mature at age 67.
Then at age 67 you will have the cash to buy the inflation-indexed annuity.
I don't think there is one universally correct answer to this for all situations.