Lifecycle Investing Challenged - Scott Cederburg

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Lifecycle Investing Challenged - Scott Cederburg

Post by BackToSchoolDad »

My apologies if this already has a thread, but I listened to Mr. Cederburg discuss this on the Rational Reminder podcast and read the paper. A lot of it is over my head, but the findings are well summarized in the introduction.

The short version is this: an internationally diversified all equity strategy outperforms a more glidepath based balanced approach no matter how you cut it.

Assuming these findings hold up, this is pretty monumental. It definitely has me rethinking my current plans. I'm all equities now and planned on adding bonds when I'm closer to retirement, but according to this I'm likely better off just remaining in equities. The only bonds the findings say are worthwhile are Tips, and even those only serve to reduce the risk of ruin, lifetime wealth is still reduced.

https://papers.ssrn.com/sol3/papers.cfm ... id=4590406

The paper is available for anyone to read. Has anyone checked this out and are rethinking their strategy?
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by alluringreality »

There have been at least a couple threads about the position. I think one was closed, which probably shows up searching the forum for Cederburg. I couldn't find where they addressed the following behavioral concern in the paper.
viewtopic.php?p=7562404#p7562404
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

alluringreality wrote: Fri Feb 02, 2024 9:56 am There have been at least a couple threads about the position. I think one was closed. I couldn't find where they addressed the following behavioral concern in the paper.
viewtopic.php?p=7562404#p7562404
I've seen threads about ditching bonds, but I'd be interested in seeing a discussion on this particular paper from the boards smarter members. It seems the implications can be profound if others aren't able to refute these findings.

It's mentioned in the conclusion that there are obvious behavioral concerns, which is what has led to the proliferation of the lifecycle model, but that investors would be better off to hold tight through it. In the interview he says there is a lot of education that investors would need to help them have a longer term view.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by alluringreality »

Here is the second locked thread around the paper that I've seen. From a behavioral standpoint, basically I think the position suggested by David Swensen deserved a more thorough discussion. I tend to have a difficult time avoiding the prior categorization.
viewtopic.php?t=419403
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by TimeIsYourFriend »

There's a small minority of investors that can handle a 100% stock portfolio through retirement let alone those that can also stick to a 50/50 US/international allocation their entire lives while avoiding the temptation to adjust things at any point. Imagine being able to strictly stick to a 50/50 US/intl with only rebalancing while faithfully contributing the same % of your income no matter what from age 20 to age 65. Then spending down that in retirement while sticking to the same portfolio no matter what from age 65 to 95. No one in the history of investing has likely ever done that.

But it is easy enough to do a computer simulation that does.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by MathWizard »

The paper appears to show results where each strategy is applied both while working and
in retirement. (Correct me if I am wrong.)

For me, the strategy needs to change in (or approaching) retirement.
You could think of retirement as the exhaustion of a fixed income source
(like a fixed length annuity) which sent you a check each month.
This will be replaced somewhat by Social Security, but not fully.

While well away from retirement, it made sense to be 100% stocks, since
any drawdowns meant that I was getting stocks on sale. But without a job,
and without bonds, I can't do that.

In retirement, I need a more dependable source of income. If stocks are up, I can
pull more from stocks, if stocks are down, I can pull more from bonds.
If stocks are way down, I can buy stocks on sale by rebalancing.

I know that 50/50 was chosen for illustration, but my stock allocation in retirement,
while not 100%, is higher than 50%.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by nisiprius »

TimeIsYourFriend wrote: Fri Feb 02, 2024 10:27 am ...Imagine being able to strictly stick to a 50/50 US/intl with only rebalancing while faithfully contributing the same % of your income no matter what from age 20 to age 65. Then spending down that in retirement while sticking to the same portfolio no matter what from age 65 to 95. No one in the history of investing has likely ever done that. But it is easy enough to do a computer simulation that does.
A lot of this stuff reminds me of the legend of Milo of Croton, the athlete who "simply" lifted a baby calf... every day... and, as a logical consequence, at the end of four years was able to lift a full-grown cow.

That ought to be a fourth Zeno's Paradox. If you are strong enough to lift a calf one day, logically the additional weight is so small you must be able to lift it the next day, so by mathematical induction you can lift an infinitely heavy cow...
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by TimeIsYourFriend »

nisiprius wrote: Fri Feb 02, 2024 10:35 am
TimeIsYourFriend wrote: Fri Feb 02, 2024 10:27 am ...Imagine being able to strictly stick to a 50/50 US/intl with only rebalancing while faithfully contributing the same % of your income no matter what from age 20 to age 65. Then spending down that in retirement while sticking to the same portfolio no matter what from age 65 to 95. No one in the history of investing has likely ever done that. But it is easy enough to do a computer simulation that does.
A lot of this stuff reminds me of the legend of Milo of Croton, the athlete who "simply" lifted a baby calf... every day... and, as a logical consequence, at the end of four years was able to lift a full-grown cow.

That ought to be a fourth Zeno's Paradox. If you are strong enough to lift a calf one day, logically the additional weight is so small you must be able to lift it the next day, so by mathematical induction you can lift an infinitely heavy cow...
Ha, interesting parallel!
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by GAAP »

I would choose a single global fund over an arbitrary mix of domestic and international.

As for ability to handle equity-heavy risk in retirement, my mother certainly had the ability with over 90% equity when she died at 88. And before anyone implies otherwise, her broker had an extremely high opinion of her ability to make investment decisions -- as do I.

It's personal -- full stop. Some can do it, some can't. Choosing an investment strategy that you believe best matches your needs, personality, etc. is much better than choosing one simply because some study says "100% equity" or "Age in Bonds" or "Rising Equity Glidepath", or anything else.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by TimeIsYourFriend »

GAAP wrote: Fri Feb 02, 2024 1:04 pm I would choose a single global fund over an arbitrary mix of domestic and international.

As for ability to handle equity-heavy risk in retirement, my mother certainly had the ability with over 90% equity when she died at 88. And before anyone implies otherwise, her broker had an extremely high opinion of her ability to make investment decisions -- as do I.

It's personal -- full stop. Some can do it, some can't. Choosing an investment strategy that you believe best matches your needs, personality, etc. is much better than choosing one simply because some study says "100% equity" or "Age in Bonds" or "Rising Equity Glidepath", or anything else.
Certainly we know that some can handle 100% equity in retirement but that could be anything really - it could be a bunch of high dividend payers that makes them more comfortable staying the course. It is different to say they can handle a fixed 50/50 US/intl broadly diversified mix of stocks all through accumulation and into retirement without ever deviating.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by GAAP »

TimeIsYourFriend wrote: Fri Feb 02, 2024 1:15 pm
GAAP wrote: Fri Feb 02, 2024 1:04 pm I would choose a single global fund over an arbitrary mix of domestic and international.

As for ability to handle equity-heavy risk in retirement, my mother certainly had the ability with over 90% equity when she died at 88. And before anyone implies otherwise, her broker had an extremely high opinion of her ability to make investment decisions -- as do I.

It's personal -- full stop. Some can do it, some can't. Choosing an investment strategy that you believe best matches your needs, personality, etc. is much better than choosing one simply because some study says "100% equity" or "Age in Bonds" or "Rising Equity Glidepath", or anything else.
Certainly we know that some can handle 100% equity in retirement but that could be anything really - it could be a bunch of high dividend payers that makes them more comfortable staying the course. It is different to say they can handle a fixed 50/50 US/intl broadly diversified mix of stocks all through accumulation and into retirement without ever deviating.
I don't understand why you think the domestic/international mix would matter. The universe of investors contains a subset that is inclined to use a mix of domestic and international equity. There is a further subset of those that would choose a particular 50/50 mix. There is a different subset of the universe that would choose 100% equity. There is also an intersection of the 100% equity subset with each of the other subsets.

If you are not in the 50/50 subset, then maybe you don't understand those who are. Similarly, if you are not in the 100% equity subset, you may not understand those investors. However, it's a long step to saying that nobody can do what you don't personally find comfortable.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by TimeIsYourFriend »

GAAP wrote: Fri Feb 02, 2024 1:40 pm
TimeIsYourFriend wrote: Fri Feb 02, 2024 1:15 pm
GAAP wrote: Fri Feb 02, 2024 1:04 pm I would choose a single global fund over an arbitrary mix of domestic and international.

As for ability to handle equity-heavy risk in retirement, my mother certainly had the ability with over 90% equity when she died at 88. And before anyone implies otherwise, her broker had an extremely high opinion of her ability to make investment decisions -- as do I.

It's personal -- full stop. Some can do it, some can't. Choosing an investment strategy that you believe best matches your needs, personality, etc. is much better than choosing one simply because some study says "100% equity" or "Age in Bonds" or "Rising Equity Glidepath", or anything else.
Certainly we know that some can handle 100% equity in retirement but that could be anything really - it could be a bunch of high dividend payers that makes them more comfortable staying the course. It is different to say they can handle a fixed 50/50 US/intl broadly diversified mix of stocks all through accumulation and into retirement without ever deviating.
I don't understand why you think the domestic/international mix would matter. The universe of investors contains a subset that is inclined to use a mix of domestic and international equity. There is a further subset of those that would choose a particular 50/50 mix. There is a different subset of the universe that would choose 100% equity. There is also an intersection of the 100% equity subset with each of the other subsets.

If you are not in the 50/50 subset, then maybe you don't understand those who are. Similarly, if you are not in the 100% equity subset, you may not understand those investors. However, it's a long step to saying that nobody can do what you don't personally find comfortable.
That was the finding of the Cederburg paper being discussed of what was optimal compared to other options like target-date funds, 100% home country equities, etc.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by drk »

TimeIsYourFriend wrote: Fri Feb 02, 2024 10:27 am There's a small minority of investors that can handle a 100% stock portfolio through retirement let alone those that can also stick to a 50/50 US/international allocation their entire lives while avoiding the temptation to adjust things at any point. Imagine being able to strictly stick to a 50/50 US/intl with only rebalancing while faithfully contributing the same % of your income no matter what from age 20 to age 65. Then spending down that in retirement while sticking to the same portfolio no matter what from age 65 to 95. No one in the history of investing has likely ever done that.

But it is easy enough to do a computer simulation that does.
The bolded assumption is not necessary. Cederburg on the Rational Reminder podcast:
Scott Cederburg wrote: As we looked at the trade-offs, if we put 20%, or 40% of money in TIPS after retirement, they're still not good for the wealth accumulation phase. But after retirement, putting 20% to 40% in TIPS, it was this trade-off where the ruin probability comes down. You're more likely to maintain consumption throughout your life if you're using a 4% rule, but your bequest is going to go way down too, because you're not generating nearly as much wealth.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by TimeIsYourFriend »

drk wrote: Fri Feb 02, 2024 1:57 pm
TimeIsYourFriend wrote: Fri Feb 02, 2024 10:27 am There's a small minority of investors that can handle a 100% stock portfolio through retirement let alone those that can also stick to a 50/50 US/international allocation their entire lives while avoiding the temptation to adjust things at any point. Imagine being able to strictly stick to a 50/50 US/intl with only rebalancing while faithfully contributing the same % of your income no matter what from age 20 to age 65. Then spending down that in retirement while sticking to the same portfolio no matter what from age 65 to 95. No one in the history of investing has likely ever done that.

But it is easy enough to do a computer simulation that does.
The bolded assumption is not necessary. Cederburg on the Rational Reminder podcast:
Scott Cederburg wrote: As we looked at the trade-offs, if we put 20%, or 40% of money in TIPS after retirement, they're still not good for the wealth accumulation phase. But after retirement, putting 20% to 40% in TIPS, it was this trade-off where the ruin probability comes down. You're more likely to maintain consumption throughout your life if you're using a 4% rule, but your bequest is going to go way down too, because you're not generating nearly as much wealth.
Thanks for pointing that out - missed that.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by ScubaHogg »

The paper can be summarized as “it’s not that equities aren’t risky, it’s that nominal bonds are much riskier than people think.”

Which I agree with wholeheartedly
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by Ben Mathew »

ScubaHogg wrote: Fri Feb 02, 2024 5:26 pm The paper can be summarized as “it’s not that equities aren’t risky, it’s that nominal bonds are much riskier than people think.”

Which I agree with wholeheartedly
+1. And the way to deal with risky nominal bonds is to duration match real bonds, not go 100% stocks. That was point #2 in my post about the paper below.
Ben Mathew wrote: Wed Jan 03, 2024 5:03 pm Some issues with applying the 100% equity conclusions of the paper:

1. The current equity premium may be lower than the realized historical equity premium. The current yields of stocks and bonds (earnings yields for stocks and TIPS yields for bonds) suggests a lower equity premium. If so, the recommendation of 100% stocks based on historical outcomes may not apply. See this post above for more on this.

2. Their analysis does not control bond risk. That favors a higher stock allocation. If you duration match real bonds (TIPS in the US), you'd eliminate inflation risk and reduce interest rate risk. That gets you much closer to risk-free bonds. Once you reduce bond risk, the recommendation of 100% stocks may not apply.

3. They used SWR withdrawals in the simulation. If you use an amortization based variable withdrawal strategy as suggested by the lifecycle model, the results could be different. In this particular analysis, the equity premium and the bond risk may be driving the results. But generally speaking, it's not a good idea to draw asset allocation conclusions from an SWR analysis if you're planning to use variable withdrawals. SWR withdrawals implies a pretty strange (and inappropriate) optimal glide path.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by GAAP »

The authors of this paper seem to confuse Lifecycle Investing with allocation glidepaths. It basically is a criticism of Target Date Funds using an SWR method.

To quote the police procedurals: "move along, nothing to see here".
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by Nathan Drake »

TimeIsYourFriend wrote: Fri Feb 02, 2024 1:15 pm
GAAP wrote: Fri Feb 02, 2024 1:04 pm I would choose a single global fund over an arbitrary mix of domestic and international.

As for ability to handle equity-heavy risk in retirement, my mother certainly had the ability with over 90% equity when she died at 88. And before anyone implies otherwise, her broker had an extremely high opinion of her ability to make investment decisions -- as do I.

It's personal -- full stop. Some can do it, some can't. Choosing an investment strategy that you believe best matches your needs, personality, etc. is much better than choosing one simply because some study says "100% equity" or "Age in Bonds" or "Rising Equity Glidepath", or anything else.
Certainly we know that some can handle 100% equity in retirement but that could be anything really - it could be a bunch of high dividend payers that makes them more comfortable staying the course. It is different to say they can handle a fixed 50/50 US/intl broadly diversified mix of stocks all through accumulation and into retirement without ever deviating.
Why?

It's as simple as buying VT and forgetting about it. Seems pretty easy.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by ScubaHogg »

Ben Mathew wrote: Fri Feb 02, 2024 7:04 pm
2. Their analysis does not control bond risk. That favors a higher stock allocation. If you duration match real bonds (TIPS in the US), you'd eliminate inflation risk and reduce interest rate risk. That gets you much closer to risk-free bonds. Once you reduce bond risk, the recommendation of 100% stocks may not apply.
Which he speaks to in interviews. Can't recall in the paper though
3. They used SWR withdrawals in the simulation. If you use an amortization based variable withdrawal strategy as suggested by the lifecycle model, the results could be different. In this particular analysis, the equity premium and the bond risk may be driving the results. But generally speaking, it's not a good idea to draw asset allocation conclusions from an SWR analysis if you're planning to use variable withdrawals. SWR withdrawals implies a pretty strange (and inappropriate) optimal glide path.
That's fair, but if it's fundamentally unexpected, and devastating, inflation risk that's killing balanced portfolios, I'm curious how much ABW (which I'm a fan of, including your TPAW) would help maintain an acceptable level of real spending?
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by Agitated_Analyst »

Whenever I read commentary in regards to the Cederburg paper, the primary discussion always revolves around the 100% stocks suggestion. However, I think there are more important aspects to Cederburg's findings that would serve investors better.

1. Inflation is a scourge and should be seen as the primary enemy of every investor. Therefore, investments that are particularly vulnerable to inflation should be rethought. Nominal bonds would fall into this category. They are not as safe as the typical advice
suggests and become less so the longer you hold them. They also don't recover real wealth after it is lost to inflation. I-Bonds and TIPS should probably get harder looks from investors for their fixed income allocations. Cederburg briefly mentioned in his first interview on Rational Reminder that he has a bias toward I-Bonds and invests in them annually to create "a personal inflation-indexed annuity". We live in a world awash in fiat currencies that are controlled by governments who would much rather fight inflation than deflation.

2. When investing in equities, international diversification is incredibly important to hedge risk. ANYTHING can happen to ONE country. One country can be devastated by war, inflation, political upheaval, etc. Cederburg also points out that the currency "risk" investors take on when investing in non-hedged international equities can actually help fight unexpected inflation because as a domestic currency loses value due to inflation, the international equities often perform better. Spreading your equity risk out geographically seems to dramatically reduce left tail bad outcomes.

3. Save and invest more. I believe Cederburg uses a 20% savings rate in the assumptions of his paper. We should all strive to do better than 20% (easier said than done, I know). However, the more you save and invest, the more you can put into "safe" assets without worrying about all your wealth getting withered away by inflation. Nothing mitigates future consumption risk more than saving and investing larger amounts.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by TimeIsYourFriend »

Nathan Drake wrote: Fri Feb 02, 2024 7:34 pm
TimeIsYourFriend wrote: Fri Feb 02, 2024 1:15 pm
GAAP wrote: Fri Feb 02, 2024 1:04 pm I would choose a single global fund over an arbitrary mix of domestic and international.

As for ability to handle equity-heavy risk in retirement, my mother certainly had the ability with over 90% equity when she died at 88. And before anyone implies otherwise, her broker had an extremely high opinion of her ability to make investment decisions -- as do I.

It's personal -- full stop. Some can do it, some can't. Choosing an investment strategy that you believe best matches your needs, personality, etc. is much better than choosing one simply because some study says "100% equity" or "Age in Bonds" or "Rising Equity Glidepath", or anything else.
Certainly we know that some can handle 100% equity in retirement but that could be anything really - it could be a bunch of high dividend payers that makes them more comfortable staying the course. It is different to say they can handle a fixed 50/50 US/intl broadly diversified mix of stocks all through accumulation and into retirement without ever deviating.
Why?

It's as simple as buying VT and forgetting about it. Seems pretty easy.
The paper did not study a market cap weighted fund but 50/50 domestic/non-domestic, domestic-only strategies, or glidepath strategies (also still 50/50 domestic/non-domestic not market cap).

It is simple to buy VT for sure. I'm curious if this is what you do and have done from the beginning of your investing journey?

I think, on average, most do not follow one strategy their entire lives, never wavering, never making changes except rebalancing. The closest might be naive 401k investors who happen to pick a target date fund (or that's the default choice) and just auto-contributes forgetting about it entirely until their 65 and need to start withdrawals.

But we are further talking about the optimal strategy being 100% equities and split 50/50 as described across home vs outside countries. There's a lot of home country biases among investors and even if they can stick to 100% equities, if their home country is outperforming and the rest of the world as a total is doing poorly, it is hard for investors to stick with. You can see that in various forum posts here even when they had only 20% in non-domestic equities which they thought was a good idea at one point but consistent underperformance meant they felt the need to "fix" the problem.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by rkhusky »

BackToSchoolDad wrote: Fri Feb 02, 2024 9:48 am The short version is this: an internationally diversified all equity strategy outperforms a more glidepath based balanced approach no matter how you cut it.
Should replace “outperforms” with “outperformed”. Future performance is unknown.

Also consider your personal situation. How will you fare if you become ill or injured and unable to work about the same time as a market crash? How will your family fare? I am not willing to risk that outcome, since I don’t have at least 2X the savings that I need to live a comfortable life and support my family.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

rkhusky wrote: Sat Feb 03, 2024 8:28 am Also consider your personal situation. How will you fare if you become ill or injured and unable to work about the same time as a market crash? How will your family fare? I am not willing to risk that outcome, since I don’t have at least 2X the savings that I need to live a comfortable life and support my family.
As mentioned by others, but we only have past data to go off of, otherwise you're just guessing. It seems the best we have.

As for my personal situation, I'm in my early 30s, have a secure government job, good disability insurance, and an eventual pension. I've already reached a point in my career where unemployment isn't a concern. No matter what happens I can generate enough income to support my family thanks being able to work for myself and low fixed incomes.

I could possibly have a 70 year investment timeline, so the question of maximizing lifetime wealth is of high salience for me.

I started investing in 2018 with 100% stocks and didn't blink during any of the declines we've seen so far. Just kept buying once a month according to the plan, so I think behaviorally I can handle it.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by TimeIsYourFriend »

BackToSchoolDad wrote: Sat Feb 03, 2024 9:43 am
rkhusky wrote: Sat Feb 03, 2024 8:28 am Also consider your personal situation. How will you fare if you become ill or injured and unable to work about the same time as a market crash? How will your family fare? I am not willing to risk that outcome, since I don’t have at least 2X the savings that I need to live a comfortable life and support my family.
As mentioned by others, but we only have past data to go off of, otherwise you're just guessing. It seems the best we have.

As for my personal situation, I'm in my early 30s, have a secure government job, good disability insurance, and an eventual pension. I've already reached a point in my career where unemployment isn't a concern. No matter what happens I can generate enough income to support my family thanks being able to work for myself and low fixed incomes.

I could possibly have a 70 year investment timeline, so the question of maximizing lifetime wealth is of high salience for me.

I started investing in 2018 with 100% stocks and didn't blink during any of the declines we've seen so far. Just kept buying once a month according to the plan, so I think behaviorally I can handle it.
What will likely happen, though, is that another paper will come out either refuting some or all of the results of this paper or telling you an even more optimal strategy than this one. What do you do then?
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

TimeIsYourFriend wrote: Sat Feb 03, 2024 9:47 am What will likely happen, though, is that another paper will come out either refuting some or all of the results of this paper or telling you an even more optimal strategy than this one. What do you do then?
I will do exactly what I did in response to this one paper, nothing. I don't plan on adding bonds for 15-20 years, so I've got time to learn and consider. But I do want to monitor advances in the study of personal finance.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by alluringreality »

I gave another try at skimming the paper to better understand the position, or to see if there was something significant I missed. Ultimately the assumptions appear to exclude portions of my personal considerations, as a private business employee. For example, it appears nonemployment simply amounts to not saving, rather than potentially drawing down assets. Since my usual lines of thought fall outside the scope, generally I fail to find much personally important, and instead my own thinking returns to David Swensen's comments around the concept of an Equity Risk Premium, such as:

"Perhaps most important, the authors overestimate the number of investors that operate with twenty- or thirty-year time horizons and underestimate the number of investors that fail to stay the course when equity markets falter."
Agitated_Analyst wrote: Sat Feb 03, 2024 12:10 am I believe Cederburg uses a 20% savings rate in the assumptions of his paper.
The paper uses 10% base savings rate for retirement, including the following from 4.1:

"Under the assumption that all individuals save 10% of their income during their working years, the (unmodeled) consumption of all individuals before retirement is independent of their retirement investment strategy. As such, we do not study consumption during the working years and do not include it in the utility calculations."
drk wrote: Fri Feb 02, 2024 1:57 pm Cederburg on the Rational Reminder podcast:
Scott Cederburg wrote: As we looked at the trade-offs, if we put 20%, or 40% of money in TIPS after retirement, they're still not good for the wealth accumulation phase. But after retirement, putting 20% to 40% in TIPS, it was this trade-off where the ruin probability comes down. You're more likely to maintain consumption throughout your life if you're using a 4% rule, but your bequest is going to go way down too, because you're not generating nearly as much wealth.
This was the main reason I decided to skim it again. The most potentially relevant items I could find was B.3 on PDF page 53 and Table B.II, on PDF page 55, to go with the comments from 5.2.
Last edited by alluringreality on Sat Feb 03, 2024 1:41 pm, edited 2 times in total.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by ScubaHogg »

Agitated_Analyst wrote: Sat Feb 03, 2024 12:10 am 3. Save and invest more. I believe Cederburg uses a 20% savings rate in the assumptions of his paper.
I believe it’s 10%

Which addresses one of the criticisms from people who haven’t read the paper (no “safe” emergency fund). Someone could save another 10% and do whatever you want with it
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by Bill Bernstein »

Given the sheer magnitude of US retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.
Of course, if all investors followed that advice, stock prices would likely get bid up to the point that expected returns would fall enough to obviate the supposed advantages of a 100% stock allocation.

More to the point, few sentient beings in this quadrant of the galaxy are capable of executing a 100% equity strategy. It's been my experience reading both the popular and academic literature that articles favoring this approach tend to appear following periods of high realized stock returns; during the Global Financial Crisis of 2007-2009, not so much.
Last edited by Bill Bernstein on Sat Feb 03, 2024 12:34 pm, edited 1 time in total.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by rkhusky »

BackToSchoolDad wrote: Sat Feb 03, 2024 9:43 am
rkhusky wrote: Sat Feb 03, 2024 8:28 am Also consider your personal situation. How will you fare if you become ill or injured and unable to work about the same time as a market crash? How will your family fare? I am not willing to risk that outcome, since I don’t have at least 2X the savings that I need to live a comfortable life and support my family.
As mentioned by others, but we only have past data to go off of, otherwise you're just guessing. It seems the best we have.

As for my personal situation, I'm in my early 30s, have a secure government job, good disability insurance, and an eventual pension. I've already reached a point in my career where unemployment isn't a concern. No matter what happens I can generate enough income to support my family thanks being able to work for myself and low fixed incomes.

I could possibly have a 70 year investment timeline, so the question of maximizing lifetime wealth is of high salience for me.

I started investing in 2018 with 100% stocks and didn't blink during any of the declines we've seen so far. Just kept buying once a month according to the plan, so I think behaviorally I can handle it.
You haven’t experienced anything like 2000-2002 or 2008 yet. Covid was momentarily scary but didn’t last long (stock market).

A car accident can disturb your plans or a cancer diagnosis.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by GAAP »

rkhusky wrote: Sat Feb 03, 2024 12:15 pm
BackToSchoolDad wrote: Sat Feb 03, 2024 9:43 am
rkhusky wrote: Sat Feb 03, 2024 8:28 am Also consider your personal situation. How will you fare if you become ill or injured and unable to work about the same time as a market crash? How will your family fare? I am not willing to risk that outcome, since I don’t have at least 2X the savings that I need to live a comfortable life and support my family.
As mentioned by others, but we only have past data to go off of, otherwise you're just guessing. It seems the best we have.

As for my personal situation, I'm in my early 30s, have a secure government job, good disability insurance, and an eventual pension. I've already reached a point in my career where unemployment isn't a concern. No matter what happens I can generate enough income to support my family thanks being able to work for myself and low fixed incomes.

I could possibly have a 70 year investment timeline, so the question of maximizing lifetime wealth is of high salience for me.

I started investing in 2018 with 100% stocks and didn't blink during any of the declines we've seen so far. Just kept buying once a month according to the plan, so I think behaviorally I can handle it.
You haven’t experienced anything like 2000-2002 or 2008 yet. Covid was momentarily scary but didn’t last long (stock market).

A car accident can disturb your plans or a cancer diagnosis.
Not to mention that while the government job may be secure, the pension may not be -- and really shouldn't be included in your planning until you are vested in it.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by rkhusky »

You are young enough that 100% stock isn’t a bad option, but as you get older the chances of accidents and diseases increases.

And as your account gets bigger, a drop means a larger dollar amount. It’s one thing to see your $100K account drop by $50k, when you are making $200K/yr. It’s another to see your $2M account drop by $1M, especially if $2M is what you were targeting for a safe retirement amount.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by Nathan Drake »

TimeIsYourFriend wrote: Sat Feb 03, 2024 8:16 am
Nathan Drake wrote: Fri Feb 02, 2024 7:34 pm
TimeIsYourFriend wrote: Fri Feb 02, 2024 1:15 pm
GAAP wrote: Fri Feb 02, 2024 1:04 pm I would choose a single global fund over an arbitrary mix of domestic and international.

As for ability to handle equity-heavy risk in retirement, my mother certainly had the ability with over 90% equity when she died at 88. And before anyone implies otherwise, her broker had an extremely high opinion of her ability to make investment decisions -- as do I.

It's personal -- full stop. Some can do it, some can't. Choosing an investment strategy that you believe best matches your needs, personality, etc. is much better than choosing one simply because some study says "100% equity" or "Age in Bonds" or "Rising Equity Glidepath", or anything else.
Certainly we know that some can handle 100% equity in retirement but that could be anything really - it could be a bunch of high dividend payers that makes them more comfortable staying the course. It is different to say they can handle a fixed 50/50 US/intl broadly diversified mix of stocks all through accumulation and into retirement without ever deviating.
Why?

It's as simple as buying VT and forgetting about it. Seems pretty easy.
The paper did not study a market cap weighted fund but 50/50 domestic/non-domestic, domestic-only strategies, or glidepath strategies (also still 50/50 domestic/non-domestic not market cap).

It is simple to buy VT for sure. I'm curious if this is what you do and have done from the beginning of your investing journey?

I think, on average, most do not follow one strategy their entire lives, never wavering, never making changes except rebalancing. The closest might be naive 401k investors who happen to pick a target date fund (or that's the default choice) and just auto-contributes forgetting about it entirely until their 65 and need to start withdrawals.

But we are further talking about the optimal strategy being 100% equities and split 50/50 as described across home vs outside countries. There's a lot of home country biases among investors and even if they can stick to 100% equities, if their home country is outperforming and the rest of the world as a total is doing poorly, it is hard for investors to stick with. You can see that in various forum posts here even when they had only 20% in non-domestic equities which they thought was a good idea at one point but consistent underperformance meant they felt the need to "fix" the problem.
A conclusion can be drawn that VT would be "close enough" to the study's construction.

I am not a VT only investor, since I also diversify across other risk premiums like Value and tilt strongly towards it. His study did not discuss Value, but intuitively I would imagine it would have improved outcomes even further.
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Re: Lifecycle Investing Challened - Scott Cederburg

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ScubaHogg wrote: Fri Feb 02, 2024 8:00 pm
Ben Mathew wrote: Fri Feb 02, 2024 7:04 pm
2. Their analysis does not control bond risk. That favors a higher stock allocation. If you duration match real bonds (TIPS in the US), you'd eliminate inflation risk and reduce interest rate risk. That gets you much closer to risk-free bonds. Once you reduce bond risk, the recommendation of 100% stocks may not apply.
Which he speaks to in interviews. Can't recall in the paper though
This is what Cederburg said in the Rational Reminder interview
@ 35:46
Cameron Passmore: How would adding inflation-protected bonds affect what you found?

Scott Cederburg: That's a great question. It's tough for us to explicitly look at this in the historical data because these things just haven't existed for the entire history and they don't exist in all countries even now. I think, Ben, you were saying that Canada has kind of phased out their program. These things, if you do have access to them, the way that we've tried to look at it is to imagine that there is some hypothetical TIPS where you're just going to get [...] Imagine that you have these inflation-like bonds that are just going to pay you 1% real rate. We try to do maybe 0%, or 2%, (One of the kind of risks with TIPS, if you're waiting until retirement to put part of your money in this, I think real rates right now are pretty high, so you would be getting a pretty good investment, but it wasn't that long ago, the real rates even on long-term TIPS were negative. There's a little bit of that reinvestment risk that you have with the TIPS.)

But as we looked at the trade-offs, if we put 20%, or 40% of money in TIPS after retirement—they're still not good for the wealth accumulation phase, but after retirement, putting 20% to 40% in TIPS—it was this trade-off where the ruin probability comes down. You're more likely to maintain consumption throughout your life if you're using a 4% rule, but your bequest is going to go way down too, because you're not generating nearly as much wealth. And then if you use one of these alternative withdrawal strategies where you're withdrawing more if you make a lot of money in your portfolio, if you link withdrawals to the savings, then it's a trade-off of, “Do I want to avoid super low consumption at some point, or do I want the possibility of getting more?” And so there is just kind of a safety trade-off that would be different across different investors, I think.
Based on what he said here, it is not clear to me if they
  • (A) substituted the 20% to 40% TIPS for nominal bonds, or
  • (B) added 20% to 40% TIPS on top of nominal bonds (i.e. substituted it for stocks)
The premium for holding real bonds vs nominal bonds is close enough to zero that using real bonds shouldn't be much of a drag on portfolio return if they are held instead of (not on top of) nominal bonds.
ScubaHogg wrote: Fri Feb 02, 2024 8:00 pm
Ben Mathew wrote: Fri Feb 02, 2024 7:04 pm 3. They used SWR withdrawals in the simulation. If you use an amortization based variable withdrawal strategy as suggested by the lifecycle model, the results could be different. In this particular analysis, the equity premium and the bond risk may be driving the results. But generally speaking, it's not a good idea to draw asset allocation conclusions from an SWR analysis if you're planning to use variable withdrawals. SWR withdrawals implies a pretty strange (and inappropriate) optimal glide path.
That's fair, but if it's fundamentally unexpected, and devastating, inflation risk that's killing balanced portfolios, I'm curious how much ABW (which I'm a fan of, including your TPAW) would help maintain an acceptable level of real spending?
Amortization based withdrawals (ABW) would not help with the inflation and interest rate risks of nominal bonds. Those risks are in the portfolio and would flow through to spending. The risk of nominal bonds can only be effectively countered by reducing inflation and interest rate risks by duration matching real bonds.

My point #3 above was referring to a different issue in the paper: that when evaluating the investment allocation recommended by the lifecycle model, they should also be using the withdrawal strategy recommended by the lifecycle model, which is ABW. Using SWR in lieu of ABW muddies the analysis. In other words, even if they addressed the issues in point #1 by modeling with a reduced equity premium, and point #2 by modeling duration matched TIPS, they can still get weird results by evaluating asset allocation using fixed withdrawals and the pass/fail grading scheme of SWR. In my opinion, all three issues need to be fixed for the paper to clearly model the choices facing investors in the US today.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

rkhusky wrote: Sat Feb 03, 2024 12:15 pm You haven’t experienced anything like 2000-2002 or 2008 yet. Covid was momentarily scary but didn’t last long (stock market).

A car accident can disturb your plans or a cancer diagnosis.
I've got good life and disability insurance, so covered there.

My portfolio dropped 25% in 2022 and I just kept on buying. I'm sure 50% is scary, but I know they'll rebound eventually.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

GAAP wrote: Sat Feb 03, 2024 12:19 pm Not to mention that while the government job may be secure, the pension may not be -- and really shouldn't be included in your planning until you are vested in it.
Luckily I am vested, but I can't draw it for a long time and I know state pensions are under strain, so I'm not counting on it being there. My state has done an okay job of managing it so far. I'm just gonna treat it as a bonus.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by bobcat2 »

The conclusion of the paper suggests that the logical extension of this line of reasoning would be that always holding 110% equities would give even better results. :D

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Last edited by bobcat2 on Sun Feb 04, 2024 11:00 am, edited 3 times in total.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by etfan »

Quote from paper:
[...] simulation follows the lifecycle of a US couple [...] begins to save a portion of their monthly income at age 25 [...] At age 65, the couple retires. They begin to receive Social Security income and draw down on savings [...]
I'm curious about these models and simulations.

It seems scientifically accurate to state that the probability of failure for a given idealistic simulation is X percent, but unlike simulations, people within that percentage don't get to try again.

In other words, let's consider a person who started saving in their 40's, their spouse doesn't work, and got laid off once or twice for a couple of years. For that person, would a 100% equities portfolio still be better than a conventional equities/bonds portfolio?
Last edited by etfan on Sat Feb 03, 2024 5:39 pm, edited 2 times in total.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by SB1234 »

etfan wrote: Sat Feb 03, 2024 5:19 pm Quote from paper:
[...] simulation follows the lifecycle of a US couple [...] begins to save a portion of their monthly income at age 25 [...] At age 65, the couple retires. They begin to receive Social Security income and draw down on savings [...]
I'm curious about these models and simulations.

It seems scientifically accurate to state that the probability of failure for a given idealistic simulation is X percent, but unlike simulations, people within that percentage don't get to try again.

In other words, let's consider a person who started saving in their 40's, their spouse doesn't work, and got laid off once or twice for a couple of years. For that person, would a 100% equities portfolio still be better than a conventional equities/bonds portfolio?
That's what the emergency fund is for
Wait....
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by etfan »

SB1234 wrote: Sat Feb 03, 2024 5:27 pm That's what the emergency fund is for
Wait....
An emergency fund does cover a certain number of minor disasters prior to retirement. But there are more potential scenarios that can't be covered by that, right?

I guess the question was: having exhausted your EF and you do need to fall back on your actual investments due to unforeseen problems, would that specific person be better off with a 100% equities than equities/bonds?
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by SB1234 »

etfan wrote: Sat Feb 03, 2024 5:32 pm
SB1234 wrote: Sat Feb 03, 2024 5:27 pm That's what the emergency fund is for
Wait....
An emergency fund does cover a certain number of minor disasters prior to retirement. But there are more potential scenarios that can't be covered by that, right?

I guess the question was: having exhausted your EF and you do need to fall back on your actual investments due to unforeseen problems, would that specific person be better off with a 100% equities than equities/bonds?
I was just trying to be funny. obviously it didn't work.
Basically in my opinion, if you have an EF you're not really 100% stocks anyways.
I think you made some excellent points about the deficiencies of the cederburg study.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

etfan wrote: Sat Feb 03, 2024 5:32 pm I guess the question was: having exhausted your EF and you do need to fall back on your actual investments due to unforeseen problems, would that specific person be better off with a 100% equities than equities/bonds?
I believe in the study there was no EF. Once the savers hit 65, they began drawing social security and monthly withdrawals of 4%.

I know they simulated periods of unemployment for one or both spouses, but I'm not sure if they calculated spending shocks. There was just flat 10% contributions.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

etfan wrote: Sat Feb 03, 2024 5:19 pm In other words, let's consider a person who started saving in their 40's, their spouse doesn't work, and got laid off once or twice for a couple of years. For that person, would a 100% equities portfolio still be better than a conventional equities/bonds portfolio?
At least within this papers parameters, I believe they would, because by being in equities, they'd have more savings to begin with and better able to recover any spent funds with the added growth from stocks.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by markgardner »

100% equity portfolios are popular as a bull market rages and fat portfolios make investors overconfident. Then, the inevitable bear market hits, and many investors panic and reduce their exposure to equities at the worst time.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by rkhusky »

BackToSchoolDad wrote: Sat Feb 03, 2024 4:14 pm
rkhusky wrote: Sat Feb 03, 2024 12:15 pm You haven’t experienced anything like 2000-2002 or 2008 yet. Covid was momentarily scary but didn’t last long (stock market).

A car accident can disturb your plans or a cancer diagnosis.
I've got good life and disability insurance, so covered there.

My portfolio dropped 25% in 2022 and I just kept on buying. I'm sure 50% is scary, but I know they'll rebound eventually.
$2M life insurance and full replacement of inflation-adjusted income until retirement age, including for illness and accident?
Last edited by rkhusky on Sat Feb 03, 2024 6:24 pm, edited 1 time in total.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by Nathan Drake »

markgardner wrote: Sat Feb 03, 2024 6:01 pm 100% equity portfolios are popular as a bull market rages and fat portfolios make investors overconfident. Then, the inevitable bear market hits, and many investors panic and reduce their exposure to equities at the worst time.
A worrying sign is how many Americans are living on more and more credit and debt.

What happens once the credit card spigot runs out and they resort to dumping their 401k holdings?
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

rkhusky wrote: Sat Feb 03, 2024 6:21 pm $2M life insurance and full replacement of inflation-adjusted income until retirement age, including for illness and accident?
Don't need that much, but yes. I'm the sole earner currently so I got good insurance.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by BackToSchoolDad »

markgardner wrote: Sat Feb 03, 2024 6:01 pm 100% equity portfolios are popular as a bull market rages and fat portfolios make investors overconfident. Then, the inevitable bear market hits, and many investors panic and reduce their exposure to equities at the worst time.
The paper this thread is about simulated many bear markets and those invested in equities faired better in the long run.

I think those without the stomach to handle a bear market should just have a bigger emergency fund.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by rkhusky »

BackToSchoolDad wrote: Sat Feb 03, 2024 6:42 pm
rkhusky wrote: Sat Feb 03, 2024 6:21 pm $2M life insurance and full replacement of inflation-adjusted income until retirement age, including for illness and accident?
Don't need that much, but yes. I'm the sole earner currently so I got good insurance.
If you’re covered by insurance for any eventuality, and you keep paying for that insurance, then you appear to be good to go. Good luck. Most people aren’t so fortunate.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by exodusing »

Bill Bernstein wrote: Sat Feb 03, 2024 12:13 pm
Given the sheer magnitude of US retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.
Of course, if all investors followed that advice, stock prices would likely get bid up to the point that expected returns would fall enough to obviate the supposed advantages of a 100% stock allocation.
Yes. One person might be able to improve her returns by increasing her equity allocation, but everyone can't. You can't increase returns for everyone by shifting everything into equities. If nothing else, changes in aggregate allocations won't change the underlying productivity of the economy.
Bill Bernstein wrote: Sat Feb 03, 2024 12:13 pmMore to the point, few sentient beings in this quadrant of the galaxy are capable of executing a 100% equity strategy. It's been my experience reading both the popular and academic literature that articles favoring this approach tend to appear following periods of high realized stock returns; during the Global Financial Crisis of 2007-2009, not so much.
100% equity is subject to both the panic selling problem and the need to sell to eat problem.

Odd that massive all equity threads appear following equity outperformance. Must be a coincidence and not performance chasing recency bias.
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Re: Lifecycle Investing Challened - Scott Cederburg

Post by GAAP »

exodusing wrote: Sat Feb 03, 2024 7:05 pm
Bill Bernstein wrote: Sat Feb 03, 2024 12:13 pmMore to the point, few sentient beings in this quadrant of the galaxy are capable of executing a 100% equity strategy. It's been my experience reading both the popular and academic literature that articles favoring this approach tend to appear following periods of high realized stock returns; during the Global Financial Crisis of 2007-2009, not so much.
100% equity is subject to both the panic selling problem and the need to sell to eat problem.

Odd that massive all equity threads appear following equity outperformance. Must be a coincidence and not performance chasing recency bias.
I've posted this before, but investor behavior is both irrational and predictable:
Image

Since 1951, the correlation between average CAPE10 and aggregate equity allocation has been 0.85. In 1974, ERISA established basic funding requirements for pensions, and provided for the creation of IRAs. Four years later, section 401(k) became law, leading to the first 401(k) retirement plan in 1980. From 1975 to 2019, the correlation between average CAPE10 and aggregate equity allocation has been an even higher 0.94. In other words, there is a strong positive correlation between stock prices and investor allocation to stocks -- investors buy more as prices rise, and vice versa. This irrational investor behavior is obvious when viewed graphically.

Aggregate allocation is available from the Fed. The Fed reports equities across two categories, Non-financial corporate business and Domestic financial sectors, in millions of dollars. The Fed breaks down debt into five different categories, all expressed in billions of dollars: Non-financial Corporate Business, Households and Nonprofit Organizations, Federal Government, State and Local Governments, and Rest of the World. With some basic math, the data reveals the aggregate AA for the domestic economy. Debt as defined by the Fed is more than just the marketable fixed income world, it also includes things like credit card usage, mortgages, etc. since those things are portions of the entire economy.
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