Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

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flylikeanosprey
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Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

First post here, but an avid reader. I didn't see any discussion on the somewhat recently released paper "Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice" (Anarkulova, Cederburg, O’Doherty 2023) so I thought I'd start one. It's certainly a compelling argument for a 100% stocks AA throughout one's entire life.

Abstract
We challenge two central tenets of lifecycle investing: (i) investors should diversify across
stocks and bonds and (ii) the young should hold more stocks than the old. An even mix of
50% domestic stocks and 50% international stocks held throughout one’s lifetime vastly outper-
forms age-based, stock-bond strategies in building wealth, supporting retirement consumption,
preserving capital, and generating bequests. These findings are based on a lifecycle model that
features dynamic processes for labor earnings, Social Security benefits, and mortality and cap-
tures the salient time-series and cross-sectional properties of long-horizon asset class returns.
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.
Some important differences in their research approach which is driving the conclusion:
We find that Stocks/I dominates despite its violation of the central tenets of lifecycle investing
that investors should diversify across stocks and bonds and use age-based strategies. Two aspects
of our methods matter for strategy evaluation. First, our simulation approach maintains time-series
and cross-sectional dependencies in asset class returns. We specifically employ a stationary block
bootstrap [Politis and Romano (1994)] with a long average block length of 120 months to preserve
long-term return dependencies. This technique contrasts with the common approaches of assuming
independent and identically distributed (IID) returns or relying on moments of short-term (e.g.,
monthly or annual) returns to study lifecycle investing. Second, we use a comprehensive dataset of
developed country returns to overcome the small sample problem posed by US data. We find that a
bootstrap simulation that uses US return data and assumes IID returns generates a sharply different
conclusion about retirement saving. Under the US-IID method, age-based strategies that diversify
across stocks and bonds appear favorable relative to Stocks/I for retirement savers for whom capital
preservation in retirement is important. Moving away from either of these two assumptions — i.e.,
acknowledging that returns are not IID or that the US sample presents a severe small sample
problem for long-horizon asset performance — restores our conclusion that Stocks/I dominates.
There's also a recent podcast from Rational Reminder where they talk about this paper: "Episode 281: Lifecycle Asset Allocation, and Retiring Successfully with Justin King" https://rationalreminder.ca/podcast/281

I found its findings somewhat surprising and very applicable to the many investors on this forum trying to choose the right asset allocation for their retirement portfolio.

Link to the paper
https://www.netspar.nl/assets/uploads/1 ... script.pdf

Edit:
Looks like there is indeed a secondary discussion on this paper via a morningstar article already.
https://bogleheads.org/forum/viewtopic. ... 1&start=50

And a reddit thread
https://www.reddit.com/r/Bogleheads/com ... er_on_100/
Last edited by flylikeanosprey on Fri Dec 08, 2023 2:52 pm, edited 1 time in total.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by David Jay »

The issue with this analysis is one of calculated optimum versus behavioral finance. More stocks = better performance is a reasonable expectation. In the same vein, 130% stocks can be expected to outperform 100% stocks.

There are surprisingly few individuals who can “stomach” a 40-50% drop in portfolio value without capitulating. The flight response kicks in and individuals flee the pain. As the first quote in my signature reminds us, personal finance is not an optimization study.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Horton »

Actually, there is an active thread on this paper:

viewtopic.php?t=417291
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flylikeanosprey
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

David Jay wrote: Wed Dec 06, 2023 4:01 pm The issue with this analysis is one of calculated optimum versus behavioral finance. More stocks = better performance is a reasonable expectation. In the same vein, 130% stocks can be expected to outperform 100% stocks.

There are surprisingly few individuals who can “stomach” a 40-50% drop in portfolio value without capitulating. The flight response kicks in and individuals flee the pain. As the first quote in my signature reminds us, personal finance is not an optimization study.
This was acknowledged in the paper
Despite the dominance of Stocks/I in achieving retirement outcomes, investors and regulators
may be uncomfortable with the tendency for larger intermediate drawdowns using the all-equity
strategy. Drawdowns inflict psychological pain, and some investors may abandon their investments
rather than stay the course. We are sympathetic to the discomfort and real costs of these bouts of
poor short-run performance. In our opinion, however, reducing these short-run losses by adopting
a QDIA strategy comes at too high a price because investors must forego the enormous economic
gains from adopting the Stocks/I strategy (estimated to be hundreds of billions of dollars per year
for US investors alone). Our findings suggest that financial advice and pension regulations should be
revised to consider all-equity strategies as viable and legal alternatives for retirement savers; we call
for alternative approaches to mitigate the costs of short-term losses, such as financial education on
staying the course, retirement account reporting standards that emphasize long-term performance,
and regulations that assist retirement savers with maintaining a long-term focus.
Certainly, an understanding of risk tolerance is required before adopting 100% stocks for a lifetime.
Horton wrote: Wed Dec 06, 2023 4:50 pm Actually, there is an active thread on this paper:

viewtopic.php?t=417291
I did find this thread after I posted and linked to it in the OP. The discussion on the paper itself is somewhat scattered, as it's only mentioned and referenced briefly. I think it's worthwhile to have a more directed thread on the paper, but of course the mods may disagree.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by retired@50 »

flylikeanosprey wrote: Wed Dec 06, 2023 6:28 pm
David Jay wrote: Wed Dec 06, 2023 4:01 pm The issue with this analysis is one of calculated optimum versus behavioral finance. More stocks = better performance is a reasonable expectation. In the same vein, 130% stocks can be expected to outperform 100% stocks.

There are surprisingly few individuals who can “stomach” a 40-50% drop in portfolio value without capitulating. The flight response kicks in and individuals flee the pain. As the first quote in my signature reminds us, personal finance is not an optimization study.
This was acknowledged in the paper
Despite the dominance of Stocks/I in achieving retirement outcomes, investors and regulators
may be uncomfortable with the tendency for larger intermediate drawdowns using the all-equity
strategy. Drawdowns inflict psychological pain, and some investors may abandon their investments
rather than stay the course. We are sympathetic to the discomfort and real costs of these bouts of
poor short-run performance. In our opinion, however, reducing these short-run losses by adopting
a QDIA strategy comes at too high a price because investors must forego the enormous economic
gains from adopting the Stocks/I strategy (estimated to be hundreds of billions of dollars per year
for US investors alone). Our findings suggest that financial advice and pension regulations should be
revised to consider all-equity strategies as viable and legal alternatives for retirement savers; we call
for alternative approaches to mitigate the costs of short-term losses, such as financial education on
staying the course
, retirement account reporting standards that emphasize long-term performance,
and regulations that assist retirement savers with maintaining a long-term focus.
Certainly, an understanding of risk tolerance is required before adopting 100% stocks for a lifetime.
I take the above paragraph from the paper to be saying something along the lines of "just tough it out" through any future market downturns.

Investor education has been tried in dozens of ways, and many people still don't seem to get it. Much of the investing population can't even comprehend that high expense ratios are killing their long term returns. Expecting them to defy their own human nature, and not panic sell, during a market downturn seems like a big ask.

I take part in the Bogleheads community because I'm trying to help others see the light, but I suspect while our collective efforts are helpful to a handful of investors, we're certainly not reaching the masses.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
BitTooAggressive
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by BitTooAggressive »

Sounds like a good strategy to get crushed by a bad sequence of returns.
Topic Author
flylikeanosprey
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

retired@50 wrote: Wed Dec 06, 2023 11:37 pm
flylikeanosprey wrote: Wed Dec 06, 2023 6:28 pm
David Jay wrote: Wed Dec 06, 2023 4:01 pm The issue with this analysis is one of calculated optimum versus behavioral finance. More stocks = better performance is a reasonable expectation. In the same vein, 130% stocks can be expected to outperform 100% stocks.

There are surprisingly few individuals who can “stomach” a 40-50% drop in portfolio value without capitulating. The flight response kicks in and individuals flee the pain. As the first quote in my signature reminds us, personal finance is not an optimization study.
This was acknowledged in the paper
Despite the dominance of Stocks/I in achieving retirement outcomes, investors and regulators
may be uncomfortable with the tendency for larger intermediate drawdowns using the all-equity
strategy. Drawdowns inflict psychological pain, and some investors may abandon their investments
rather than stay the course. We are sympathetic to the discomfort and real costs of these bouts of
poor short-run performance. In our opinion, however, reducing these short-run losses by adopting
a QDIA strategy comes at too high a price because investors must forego the enormous economic
gains from adopting the Stocks/I strategy (estimated to be hundreds of billions of dollars per year
for US investors alone). Our findings suggest that financial advice and pension regulations should be
revised to consider all-equity strategies as viable and legal alternatives for retirement savers; we call
for alternative approaches to mitigate the costs of short-term losses, such as financial education on
staying the course
, retirement account reporting standards that emphasize long-term performance,
and regulations that assist retirement savers with maintaining a long-term focus.
Certainly, an understanding of risk tolerance is required before adopting 100% stocks for a lifetime.
I take the above paragraph from the paper to be saying something along the lines of "just tough it out" through any future market downturns.

Investor education has been tried in dozens of ways, and many people still don't seem to get it. Much of the investing population can't even comprehend that high expense ratios are killing their long term returns. Expecting them to defy their own human nature, and not panic sell, during a market downturn seems like a big ask.

I take part in the Bogleheads community because I'm trying to help others see the light, but I suspect while our collective efforts are helpful to a handful of investors, we're certainly not reaching the masses.

Regards,
It's research like this though that drives financial literacy. Obviously, changing the retirement portfolio status quo isn't going to happen from this paper alone, but it's an important step in that process. And those that understand the behavioral risks that come with a more volatile portfolio, such as many on this forum or potentially financial advisors, may use this research to change their approach.
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
Are you disagreeing with any specific results or process in the research?
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Horton »

I ran two simulations to test this idea. I selected assumptions that I think are reasonable (and did not play around with them to get specific results), but I recognize that others may want to use different assumptions. Feel free and post your results! :beer

Overall, 50% US / 50% non-US stocks has better upside (which is expected), but more downside risk than a typical TDF glidepath. IMO, this is common sense and contrary to the conclusions of the paper.

NOTE: You will need to click "Run Simulation" to get the results.

Scenario 1

- 50% US Stocks / 50% non-US stocks rebalanced monthly
- 40 years of contributing $3K per month followed by 35 years of withdrawing $2K per month
- Starting balance of $10K
- Risk free rate of 2.25% per annum, annual inflation of 2.5% per annum, expected US and non-stock returns of 5% per annum, and expected TIPS return of 2.25% per annum
- Historical volatility and correlations

Image

Scenario 2

Same as scenario 1, except:

- Starting portfolio of 45% US Stocks / 45% non-US stocks / 10% TIPS rebalanced monthly
- Ending portfolio of 25% US Stocks / 25% non-US stocks / 50% TIPS rebalanced monthly
- 25 year glidepath

Image
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

Horton wrote: Fri Dec 08, 2023 4:23 pm I ran two simulations to test this idea. I selected assumptions that I think are reasonable (and did not play around with them to get specific results), but I recognize that others may want to use different assumptions. Feel free and post your results! :beer

Overall, 50% US / 50% non-US stocks has better upside (which is expected), but more downside risk than a typical TDF glidepath. IMO, this is common sense and contrary to the conclusions of the paper.
...
I think it's hard to compare your simulations to the paper's when the datasets are so wildly different (simulation 1 uses just Jan 1986 - Nov 2023 and sim 2 uses Jan 2001 - Nov 2023).

The research includes tons of simulations with arguably the most comprehensive dataset available today, and I do wish there was a way to have that data available publicly to tinker with in simulations with varying assumptions.

Edit: They do have the summary data available in table II, I wonder if there's a way to incorporate that in some simulation software.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Horton »

flylikeanosprey wrote: Fri Dec 08, 2023 8:37 pm I think it's hard to compare your simulations to the paper's when the datasets are so wildly different (simulation 1 uses just Jan 1986 - Nov 2023 and sim 2 uses Jan 2001 - Nov 2023).

The research includes tons of simulations with arguably the most comprehensive dataset available today, and I do wish there was a way to have that data available publicly to tinker with in simulations with varying assumptions.

Edit: They do have the summary data available in table II, I wonder if there's a way to incorporate that in some simulation software.
The time constraints are only used to determine the historical volatilities and correlations, not returns, in those simulations, so I doubt it has a material impact. The key though is that their analysis is all based on historical data and is likely influenced by the favorable US stock returns over the last century. It took me 15 minutes to create a plausible forward looking scenario (without cherry picking) that disproves the efficacy of the strategy. As such, it seems like a HUGE leap for the authors to claim:
Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.
I would also point out that TIPS were not available for most of the sample that the authors evaluated. That’s a big deal and I don’t see it mentioned in the article.
Last edited by Horton on Fri Dec 08, 2023 9:23 pm, edited 1 time in total.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by grabiner »

David Jay wrote: Wed Dec 06, 2023 4:01 pm The issue with this analysis is one of calculated optimum versus behavioral finance. More stocks = better performance is a reasonable expectation. In the same vein, 130% stocks can be expected to outperform 100% stocks.

There are surprisingly few individuals who can “stomach” a 40-50% drop in portfolio value without capitulating. The flight response kicks in and individuals flee the pain. As the first quote in my signature reminds us, personal finance is not an optimization study.
This is the reason for one of my standard items of advice: you should not hold more than 80% stock until you have been through a bear market and know how you react. (For me, this was 2000-2002, when I lost a quarter of my portfolio and was still willing to increase my risk level; I stuck with the increased risk level in 2007-2009 and March 2020, rebalancing to buy more stock both times.)
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Horton »

I’d also recommend reading Ben Mathew’s points on this thread:

viewtopic.php?p=7561566#p7561566
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Horton »

Last post for a while… :D

It’s entirely possible for all stocks to be best for some people, but it’s a stretch to claim its best for all (or even most, probably). The better approach is to use the lifecycle model and its requisite inputs (your Relative Risk Aversion (RRA), assets, income, savings, age, Social Security, pensions, annuities, desired retirement age & income, expected returns, etc.) to determine a personalized plan for you. There are tools that can do this easily (e.g., TPAW, MaxiFi, and so on).
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by AlwaysLearningMore »

"In theory there is no difference between theory and practice - in practice there is." -- Yogi Berra

OP: Your thoughts/opinions, please;
How many investors have this level of risk tolerance?
Do you see this approach as widely applicable for the investing populace in general?
Would you anticipate any difficulty with the actual implementation of this approach for advisors or 401(k) administrators re: professional liability?
How many financial advisors do you know well? Ask the ones with plenty of gray hair about the GMO* moments in their careers.
Do you think this would be a good approach into late retirement as well?
Do you think this would be a good approach for a special needs Trust in place to care for a disabled child?

*Clients who call during severe market downturns and insist Get Me Out!
Last edited by AlwaysLearningMore on Fri Dec 08, 2023 9:55 pm, edited 1 time in total.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by OnlyBugs »

BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
I think this is a valid concern. The Rational Reminder episode mentioned “draw down risk” as an issue. I think that and sequence of returns risk are related concepts based on some brief googling.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by randomguy »

OnlyBugs wrote: Fri Dec 08, 2023 9:53 pm
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
I think this is a valid concern. The Rational Reminder episode mentioned “draw down risk” as an issue. I think that and sequence of returns risk are related concepts based on some brief googling.
Lets look at the 2000 retire and compare. 1 million bucks, 4% SWR
a) 100% stocks: 347k
b) 70/30: 589k
c) 50/50 : 621k

They all might make 30 years but one group is sweating a lot more. Studies have consistently shown that things like age in bonds is too conservative from a mathematical point of view and that sticking in the 50-70% range for stocks is better. Going to the 100% stock extreme is a roll of the dice that your first 10 years are not poor. You need to decide if being a big winner is worth the risk of being a big loser. Just because some risk is good though doesn't mean you should keep loading up. I have no doubt that 150% stocks will end up with better average ending balances. I also have no doubt your failure rate will also increase.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

Horton wrote: Fri Dec 08, 2023 9:27 pm
I’d also recommend reading Ben Mathew’s points on this thread:

viewtopic.php?p=7561566#p7561566
Thanks for linking. The paper doesn't address implement models for each withdrawal method, but they do mention that dynamic or alternate withdrawal methods wouldn't change the overall conclusion.
We note that the inclusion of Social Security income as a lower bound on retirement consumption and bequests as a source of utility from excess savings at death both work to reduce differences in utilities between the 4% rule and dynamic withdrawal strategies that may reduce the probabilities of very low or very high terminal retirement account balances. In the Internet Appendix, we demonstrate that our main conclusions regarding the relative performance of the asset allocation strategies are robust to alternative retirement withdrawal rules.
Horton wrote: Fri Dec 08, 2023 9:18 pm
flylikeanosprey wrote: Fri Dec 08, 2023 8:37 pm I think it's hard to compare your simulations to the paper's when the datasets are so wildly different (simulation 1 uses just Jan 1986 - Nov 2023 and sim 2 uses Jan 2001 - Nov 2023).

The research includes tons of simulations with arguably the most comprehensive dataset available today, and I do wish there was a way to have that data available publicly to tinker with in simulations with varying assumptions.

Edit: They do have the summary data available in table II, I wonder if there's a way to incorporate that in some simulation software.
The time constraints are only used to determine the historical volatilities and correlations, not returns, in those simulations, so I doubt it has a material impact. The key though is that their analysis is all based on historical data and is likely influenced by the favorable US stock returns over the last century. It took me 15 minutes to create a plausible forward looking scenario (without cherry picking) that disproves the efficacy of the strategy. As such, it seems like a HUGE leap for the authors to claim:
Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.
How exactly do your simulations improve on the work and simulations that were illustrated in the paper?
Horton wrote: Fri Dec 08, 2023 9:42 pm It’s entirely possible for all stocks to be best for some people, but it’s a stretch to claim its best for all (or even most, probably). The better approach is to use the lifecycle model and its requisite inputs (your Relative Risk Aversion (RRA), assets, income, savings, age, Social Security, pensions, annuities, desired retirement age & income, expected returns, etc.) to determine a personalized plan for you. There are tools that can do this easily (e.g., TPAW, MaxiFi, and so on).
Agreed, but I don't think the authors are claiming it's the best for all investors.
randomguy wrote: Fri Dec 08, 2023 11:17 pm
OnlyBugs wrote: Fri Dec 08, 2023 9:53 pm
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
I think this is a valid concern. The Rational Reminder episode mentioned “draw down risk” as an issue. I think that and sequence of returns risk are related concepts based on some brief googling.
Lets look at the 2000 retire and compare. 1 million bucks, 4% SWR
a) 100% stocks: 347k
b) 70/30: 589k
c) 50/50 : 621k

They all might make 30 years but one group is sweating a lot more. Studies have consistently shown that things like age in bonds is too conservative from a mathematical point of view and that sticking in the 50-70% range for stocks is better. Going to the 100% stock extreme is a roll of the dice that your first 10 years are not poor. You need to decide if being a big winner is worth the risk of being a big loser. Just because some risk is good though doesn't mean you should keep loading up. I have no doubt that 150% stocks will end up with better average ending balances. I also have no doubt your failure rate will also increase.
Look at table B.II, it spells out the effectiveness of various bond percentages at retirement assuming a 100% stock portfolio up until retirement. Any allocation in bonds had a negative effect. The overall argument is you are actually less likely to experience financial ruin with 100% stocks in retirement based on the data provided. I'm sure you can cherry-pick dates to support any argument.
AlwaysLearningMore wrote: Fri Dec 08, 2023 9:44 pm "In theory there is no difference between theory and practice - in practice there is." -- Yogi Berra

OP: Your thoughts/opinions, please;
How many investors have this level of risk tolerance?
Do you see this approach as widely applicable for the investing populace in general?
Would you anticipate any difficulty with the actual implementation of this approach for advisors or 401(k) administrators re: professional liability?
How many financial advisors do you know well? Ask the ones with plenty of gray hair about the GMO* moments in their careers.
Do you think this would be a good approach into late retirement as well?
Do you think this would be a good approach for a special needs Trust in place to care for a disabled child?

*Clients who call during severe market downturns and insist Get Me Out!
I think you're missing the point of the paper. It's not to suggest the general populace should drop what they're doing and blindly change their retirement portfolios to 100% stocks.
Our findings should be of interest to regulators in defining QDIA-eligible strategies, investment management companies in retirement fund design, and plan sponsors and participants in fund selection.

...

Our findings suggest that financial advice and pension regulations should be revised to consider all-equity strategies as viable and legal alternatives for retirement savers; we call for alternative approaches to mitigate the costs of short-term losses, such as financial education on staying the course, retirement account reporting standards that emphasize long-term performance, and regulations that assist retirement savers with maintaining a long-term focus.
The right-choice for the general populace is probably not to be in 100% stocks, but since this paper has come out, they've at least shown it's the optimal choice without consideration for risk-aversion. I don't think many people were arguing (or at least proven) before this research that 100% stocks (50/50 domestic and international) was the optimal portfolio throughout all stages of life.
Last edited by flylikeanosprey on Sat Dec 09, 2023 8:29 am, edited 1 time in total.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by BitTooAggressive »

flylikeanosprey wrote: Fri Dec 08, 2023 2:37 pm
retired@50 wrote: Wed Dec 06, 2023 11:37 pm
flylikeanosprey wrote: Wed Dec 06, 2023 6:28 pm
David Jay wrote: Wed Dec 06, 2023 4:01 pm The issue with this analysis is one of calculated optimum versus behavioral finance. More stocks = better performance is a reasonable expectation. In the same vein, 130% stocks can be expected to outperform 100% stocks.

There are surprisingly few individuals who can “stomach” a 40-50% drop in portfolio value without capitulating. The flight response kicks in and individuals flee the pain. As the first quote in my signature reminds us, personal finance is not an optimization study.
This was acknowledged in the paper
Despite the dominance of Stocks/I in achieving retirement outcomes, investors and regulators
may be uncomfortable with the tendency for larger intermediate drawdowns using the all-equity
strategy. Drawdowns inflict psychological pain, and some investors may abandon their investments
rather than stay the course. We are sympathetic to the discomfort and real costs of these bouts of
poor short-run performance. In our opinion, however, reducing these short-run losses by adopting
a QDIA strategy comes at too high a price because investors must forego the enormous economic
gains from adopting the Stocks/I strategy (estimated to be hundreds of billions of dollars per year
for US investors alone). Our findings suggest that financial advice and pension regulations should be
revised to consider all-equity strategies as viable and legal alternatives for retirement savers; we call
for alternative approaches to mitigate the costs of short-term losses, such as financial education on
staying the course
, retirement account reporting standards that emphasize long-term performance,
and regulations that assist retirement savers with maintaining a long-term focus.
Certainly, an understanding of risk tolerance is required before adopting 100% stocks for a lifetime.
I take the above paragraph from the paper to be saying something along the lines of "just tough it out" through any future market downturns.

Investor education has been tried in dozens of ways, and many people still don't seem to get it. Much of the investing population can't even comprehend that high expense ratios are killing their long term returns. Expecting them to defy their own human nature, and not panic sell, during a market downturn seems like a big ask.

I take part in the Bogleheads community because I'm trying to help others see the light, but I suspect while our collective efforts are helpful to a handful of investors, we're certainly not reaching the masses.

Regards,
It's research like this though that drives financial literacy. Obviously, changing the retirement portfolio status quo isn't going to happen from this paper alone, but it's an important step in that process. And those that understand the behavioral risks that come with a more volatile portfolio, such as many on this forum or potentially financial advisors, may use this research to change their approach.
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
Are you disagreeing with any specific results or process in the research?
I saw no specifics. I know if you are 100% stocks during distribution and have to sell in a prolonged downturn you can run out of assets.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by BitTooAggressive »

randomguy wrote: Fri Dec 08, 2023 11:17 pm
OnlyBugs wrote: Fri Dec 08, 2023 9:53 pm
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
I think this is a valid concern. The Rational Reminder episode mentioned “draw down risk” as an issue. I think that and sequence of returns risk are related concepts based on some brief googling.
Lets look at the 2000 retire and compare. 1 million bucks, 4% SWR
a) 100% stocks: 347k
b) 70/30: 589k
c) 50/50 : 621k

They all might make 30 years but one group is sweating a lot more. Studies have consistently shown that things like age in bonds is too conservative from a mathematical point of view and that sticking in the 50-70% range for stocks is better. Going to the 100% stock extreme is a roll of the dice that your first 10 years are not poor. You need to decide if being a big winner is worth the risk of being a big loser. Just because some risk is good though doesn't mean you should keep loading up. I have no doubt that 150% stocks will end up with better average ending balances. I also have no doubt your failure rate will also increase.
Exactly. I plan to have a rising equity percentage in retirement but not 100% stocks.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Horton »

flylikeanosprey wrote: Sat Dec 09, 2023 12:30 am
Horton wrote: Fri Dec 08, 2023 9:42 pm It’s entirely possible for all stocks to be best for some people, but it’s a stretch to claim its best for all (or even most, probably). The better approach is to use the lifecycle model and its requisite inputs (your Relative Risk Aversion (RRA), assets, income, savings, age, Social Security, pensions, annuities, desired retirement age & income, expected returns, etc.) to determine a personalized plan for you. There are tools that can do this easily (e.g., TPAW, MaxiFi, and so on).
Agreed, but I don't think the authors are claiming it's the best for all investors.
I’m not sure how the authors can claim:
Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.
Without implying that all investors should use such strategy.
80% global equities (faith-based tilt) + 20% TIPS (LDI)
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am
I saw no specifics. I know if you are 100% stocks during distribution and have to sell in a prolonged downturn you can run out of assets.
This thinking is actually challenged in the paper. You're less likely to experience financial ruin with 100% stocks/I than with any of the other proposed asset allocations during distribution.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by AlwaysLearningMore »

flylikeanosprey wrote: Sat Dec 09, 2023 12:30 am
Horton wrote: Fri Dec 08, 2023 9:27 pm
I’d also recommend reading Ben Mathew’s points on this thread:

viewtopic.php?p=7561566#p7561566
Thanks for linking. The paper doesn't address implement models for each withdrawal method, but they do mention that dynamic or alternate withdrawal methods wouldn't change the overall conclusion.
We note that the inclusion of Social Security income as a lower bound on retirement consumption and bequests as a source of utility from excess savings at death both work to reduce differences in utilities between the 4% rule and dynamic withdrawal strategies that may reduce the probabilities of very low or very high terminal retirement account balances. In the Internet Appendix, we demonstrate that our main conclusions regarding the relative performance of the asset allocation strategies are robust to alternative retirement withdrawal rules.
Horton wrote: Fri Dec 08, 2023 9:18 pm
flylikeanosprey wrote: Fri Dec 08, 2023 8:37 pm I think it's hard to compare your simulations to the paper's when the datasets are so wildly different (simulation 1 uses just Jan 1986 - Nov 2023 and sim 2 uses Jan 2001 - Nov 2023).

The research includes tons of simulations with arguably the most comprehensive dataset available today, and I do wish there was a way to have that data available publicly to tinker with in simulations with varying assumptions.

Edit: They do have the summary data available in table II, I wonder if there's a way to incorporate that in some simulation software.
The time constraints are only used to determine the historical volatilities and correlations, not returns, in those simulations, so I doubt it has a material impact. The key though is that their analysis is all based on historical data and is likely influenced by the favorable US stock returns over the last century. It took me 15 minutes to create a plausible forward looking scenario (without cherry picking) that disproves the efficacy of the strategy. As such, it seems like a HUGE leap for the authors to claim:
Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.
How exactly do your simulations improve on the work and simulations that were illustrated in the paper?
Horton wrote: Fri Dec 08, 2023 9:42 pm It’s entirely possible for all stocks to be best for some people, but it’s a stretch to claim its best for all (or even most, probably). The better approach is to use the lifecycle model and its requisite inputs (your Relative Risk Aversion (RRA), assets, income, savings, age, Social Security, pensions, annuities, desired retirement age & income, expected returns, etc.) to determine a personalized plan for you. There are tools that can do this easily (e.g., TPAW, MaxiFi, and so on).
Agreed, but I don't think the authors are claiming it's the best for all investors.
randomguy wrote: Fri Dec 08, 2023 11:17 pm
OnlyBugs wrote: Fri Dec 08, 2023 9:53 pm
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
I think this is a valid concern. The Rational Reminder episode mentioned “draw down risk” as an issue. I think that and sequence of returns risk are related concepts based on some brief googling.
Lets look at the 2000 retire and compare. 1 million bucks, 4% SWR
a) 100% stocks: 347k
b) 70/30: 589k
c) 50/50 : 621k

They all might make 30 years but one group is sweating a lot more. Studies have consistently shown that things like age in bonds is too conservative from a mathematical point of view and that sticking in the 50-70% range for stocks is better. Going to the 100% stock extreme is a roll of the dice that your first 10 years are not poor. You need to decide if being a big winner is worth the risk of being a big loser. Just because some risk is good though doesn't mean you should keep loading up. I have no doubt that 150% stocks will end up with better average ending balances. I also have no doubt your failure rate will also increase.
Look at table B.II, it spells out the effectiveness of various bond percentages at retirement assuming a 100% stock portfolio up until retirement. Any allocation in bonds had a negative effect. The overall argument is you are actually less likely to experience financial ruin with 100% stocks in retirement based on the data provided. I'm sure you can cherry-pick dates to support any argument.
AlwaysLearningMore wrote: Fri Dec 08, 2023 9:44 pm "In theory there is no difference between theory and practice - in practice there is." -- Yogi Berra

OP: Your thoughts/opinions, please;
How many investors have this level of risk tolerance?
Do you see this approach as widely applicable for the investing populace in general?
Would you anticipate any difficulty with the actual implementation of this approach for advisors or 401(k) administrators re: professional liability?
How many financial advisors do you know well? Ask the ones with plenty of gray hair about the GMO* moments in their careers.
Do you think this would be a good approach into late retirement as well?
Do you think this would be a good approach for a special needs Trust in place to care for a disabled child?

*Clients who call during severe market downturns and insist Get Me Out!
I think you're missing the point of the paper. It's not to suggest the general populace should drop what they're doing and blindly change their retirement portfolios to 100% stocks.
Our findings should be of interest to regulators in defining QDIA-eligible strategies, investment management companies in retirement fund design, and plan sponsors and participants in fund selection.

...

Our findings suggest that financial advice and pension regulations should be revised to consider all-equity strategies as viable and legal alternatives for retirement savers; we call for alternative approaches to mitigate the costs of short-term losses, such as financial education on staying the course, retirement account reporting standards that emphasize long-term performance, and regulations that assist retirement savers with maintaining a long-term focus.
The right-choice for the general populace is probably not to be in 100% stocks, but since this paper has come out, they've at least shown it's the optimal choice without consideration for risk-aversion. I don't think many people were arguing (or at least proven) before this research that 100% stocks (50/50 domestic and international) was the optimal portfolio throughout all stages of life.
OP, you missed the points of my questions to YOU. What are *YOUR* opinions on the questions I posed to YOU?
(A blanket 'well, it's not for everyone' can apply to most investment approaches and evades the questions.)
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

AlwaysLearningMore wrote: Fri Dec 08, 2023 9:44 pm
OP, you missed the points of my questions to YOU. What are *YOUR* opinions on the questions I posed to YOU?
(A blanket 'well, it's not for everyone' can apply to most investment approaches and evades the questions.)
I don't really see how my opinions on those questions are relevant. I started this thread to hopefully be more dedicated conversation around the paper and the research presented than what already exists. The authors have already acknowledged you need a high risk tolerance to adopt this strategy so I'm not sure what you're getting at.
Last edited by flylikeanosprey on Sat Dec 09, 2023 9:12 am, edited 2 times in total.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by nedsaid »

I get what folks are saying regarding the 100% stock allocation portfolios and Lifecycle investing but speaking for myself I don't have the stomach for that much volatility. As another poster noted, a 100% stock portfolio could run into problems with the sequence of returns phenomenon, a really bad bear market right around a person's retirement date can really wreak havoc to a portfolio. Sounds great, the data and the projections look great, just dubious about how people would fare doing this in real life. Sort of reminds me of the "First 20% of bonds in long-term treasuries" thread. Worked great
until it didn't. That topic author has made himself mighty scarce around these parts lately.

There is something to this thread and the "First 20%" thread but it shows what can happen when a good idea gets taken too far. I think John Bogle's comment that a 65% stock/35% bond portfolio is good for most investors is a better approach.
What I would say is that most investors can probably invest more aggressively than they think, I wouldn't take it all the way out to 100% stocks. The one thing that you never thought would happen actually does happen at some point, hopefully not in our lifetimes.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by AlwaysLearningMore »

flylikeanosprey wrote: Sat Dec 09, 2023 9:10 am
AlwaysLearningMore wrote: Fri Dec 08, 2023 9:44 pm
OP, you missed the points of my questions to YOU. What are *YOUR* opinions on the questions I posed to YOU?
(A blanket 'well, it's not for everyone' can apply to most investment approaches and evades the questions.)
I don't really see how my opinions on those questions are relevant. I started this thread to hopefully be more dedicated conversation around the paper and the research presented than what already exists. The authors have already acknowledged you need a high risk tolerance to adopt this strategy so I'm not sure what you're getting at.
Gotcha.

"Theory and practice sometimes clash. And when that happens, theory loses. Every single time." ~ Linus Torvalds
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by gammalaser »

retirement account reporting standards that emphasize long-term performance,
and regulations that assist retirement savers with maintaining a long-term focus.
This was an interesting point for me. I don't think the behavioral issues in finance come about by accident and maybe we shouldn't accept that "that's the way it is". Why do the brokerages and retirement plans emphasize daily account balance when you log in if you are 20-30 years from retirement? Could it be that the presentation of the information drives wrong behavior.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by BitTooAggressive »

flylikeanosprey wrote: Sat Dec 09, 2023 8:45 am
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am
I saw no specifics. I know if you are 100% stocks during distribution and have to sell in a prolonged downturn you can run out of assets.
This thinking is actually challenged in the paper. You're less likely to experience financial ruin with 100% stocks/I than with any of the other proposed asset allocations during distribution.
Nonsense. They discuss averages and such but they don’t know future returns.

It’s like an airline saying everything is great because on average each plane is flying with 2/3 fuel. But you are either on a plane with enough or not.

Little consolation if you are having a fuel emergency knowing most of the flights have plenty.

If your only goal is to pass on maximum wealth sure go 100% equities and live under a bridge.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by randomguy »

flylikeanosprey wrote: Sat Dec 09, 2023 8:45 am
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am
I saw no specifics. I know if you are 100% stocks during distribution and have to sell in a prolonged downturn you can run out of assets.
This thinking is actually challenged in the paper. You're less likely to experience financial ruin with 100% stocks/I than with any of the other proposed asset allocations during distribution.
25 years ago, trinity showed that 100/0 was better than 50/50. It also showed that 75/25 was better than 100/0. And yet for some reason this paper chose to skip testing that one. If you are paranoid it is because it didn't fit the narrative they were pushing. Note there is some hand waving where both 100/0 and 50/50 have roughly the same survivability at 4% but 100/0 is far more likely to leave you a pile of cash but can also leave you broke in year like 15. 50/50 is likely to leave you a lot poorer when you die but you also never run out of money til like year 28.

We have know forever that mathematically people need a lot more risk than things like age in bonds. The question has been can you stomach the risk (it is one thing to have a 50% drop when you are not spending the money. It is another when it is paying the bills) or do you have to give up some upside for protection.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by flylikeanosprey »

BitTooAggressive wrote: Sat Dec 09, 2023 11:19 am
flylikeanosprey wrote: Sat Dec 09, 2023 8:45 am
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am
I saw no specifics. I know if you are 100% stocks during distribution and have to sell in a prolonged downturn you can run out of assets.
This thinking is actually challenged in the paper. You're less likely to experience financial ruin with 100% stocks/I than with any of the other proposed asset allocations during distribution.
Nonsense. They discuss averages and such but they don’t know future returns.

It’s like an airline saying everything is great because on average each plane is flying with 2/3 fuel. But you are either on a plane with enough or not.

Little consolation if you are having a fuel emergency knowing most of the flights have plenty.

If your only goal is to pass on maximum wealth sure go 100% equities and live under a bridge.
I'll quote directly
Finally, retirement savers and retirees may be rightfully concerned about the possibility that the stock market will perform poorly during their lifetime. A poor stock market outcome would seem to sound the death knell for Stocks/I, whereas the TDF and other QDIAs may offer protection by
diversifying into fixed income. In the Internet Appendix, we condition on the ex post realization of the couple’s real return on domestic stocks. Interestingly, Stocks/I dominates the TDF in each quintile of realized stock return. When domestic equity does poorly, bonds and bills also tend to do poorly. Fixed income does not offer an adequate safe haven against poor equity outcomes over the long run.
randomguy wrote: Sat Dec 09, 2023 11:34 am
flylikeanosprey wrote: Sat Dec 09, 2023 8:45 am
BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am
I saw no specifics. I know if you are 100% stocks during distribution and have to sell in a prolonged downturn you can run out of assets.
This thinking is actually challenged in the paper. You're less likely to experience financial ruin with 100% stocks/I than with any of the other proposed asset allocations during distribution.
25 years ago, trinity showed that 100/0 was better than 50/50. It also showed that 75/25 was better than 100/0. And yet for some reason this paper chose to skip testing that one. If you are paranoid it is because it didn't fit the narrative they were pushing. Note there is some hand waving where both 100/0 and 50/50 have roughly the same survivability at 4% but 100/0 is far more likely to leave you a pile of cash but can also leave you broke in year like 15. 50/50 is likely to leave you a lot poorer when you die but you also never run out of money til like year 28.

We have know forever that mathematically people need a lot more risk than things like age in bonds. The question has been can you stomach the risk (it is one thing to have a 50% drop when you are not spending the money. It is another when it is paying the bills) or do you have to give up some upside for protection.
They did test 75/25 though, and every stock to bond variant between 100/0 and 50/50 in 5% increments.
gammalaser wrote: Sat Dec 09, 2023 10:25 am
retirement account reporting standards that emphasize long-term performance, and regulations that assist retirement savers with maintaining a long-term focus.
This was an interesting point for me. I don't think the behavioral issues in finance come about by accident and maybe we shouldn't accept that "that's the way it is". Why do the brokerages and retirement plans emphasize daily account balance when you log in if you are 20-30 years from retirement? Could it be that the presentation of the information drives wrong behavior.
Agreed wholeheartedly. It will certainly take a lot of time and change in financial literacy/presentation beyond just this paper to shift people's mindsets, but it's definitely possible. This is potentially an exciting first step in changing fundamental assumptions about how we think about lifecycle investing.
nedsaid wrote: Sat Dec 09, 2023 9:10 am As another poster noted, a 100% stock portfolio could run into problems with the sequence of returns phenomenon, a really bad bear market right around a person's retirement date can really wreak havoc to a portfolio.
This kind of thinking is actually directly challenged in the research. Bonds were shown not to be an effective safe harbor in a bear market, and rather international stocks proved to be a better hedge and diversification asset.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by CloseEnough »

AlwaysLearningMore wrote: Fri Dec 08, 2023 9:44 pm "In theory there is no difference between theory and practice - in practice there is." -- Yogi Berra
Great quote. Not a true Yogiism, however.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Nathan Drake »

BitTooAggressive wrote: Thu Dec 07, 2023 3:49 am Sounds like a good strategy to get crushed by a bad sequence of returns.
Being highly diversified in Equities (not just 100% US) is what allows this strategy to work (Global investing)
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Ben Mathew »

The paper says "We challenge two central tenets of lifecycle investing: (i) investors should diversify across stocks and bonds and (ii) the young should hold more stocks than the old." They claim that 100% stocks throughout life will achieve a better outcome.

The standard lifecycle model will recommend 100% stocks throughout life if you assume a high enough equity premium. The US historical equity premium of 5.5% in Shiller's data is high enough to produce 100% stock recommendations at moderately high risk tolerance:

Example:

30 year old planning to retire at age 65, planning till age 100.
Current portfolio balance: $50,000
Future savings: $2,000 per month during working years
Social Security: $2,500 per month from age 70
Risk tolerance: 16 (relative risk aversion of 1.94)
Expected real returns: Historical (stocks 8.6%, bonds 3.1%)

Here's the asset allocation generated by the lifecycle model in TPAW:

Image

It's 100% stocks throughout life. Because the equity premium being assumed is the one that was realized historically—a very high 5.5%.

But if we use the suggested expected returns in the planner which are based on current earnings yields for stocks and TIPS yields for bonds, the equity premium would be 4.1% stocks - 2.0% bonds = 2.1%. Much lower than what we got historically.

Then the lifecycle model gives the familiar advice to mix stocks and bonds with more bonds at higher ages:

Image

Unsurprisingly, the optimal asset allocation will depend a lot on the equity premium. If it's high enough, it should be all stocks all the time.

This paper could be reframed as "how high is the equity premium?" rather than saying something about the lifecycle model vs some other model.

Historical premiums in the US have been really high. Two issues with using only raw historical returns to arrive at an estimate of the equity premium:

1. If the data tells you that everyone should be 100% stocks all the time, then it's also telling you that the bonds are mispriced relative to stocks. Somebody should want to hold bonds. Bonds prices should be low enough (the expected return high enough) that it should be attractive to some investors at least.

2. The difference between stock and bond yields are currently much lower than what prevailed historically. That would suggest that the expected equity premium is also lower.

Some perspective that Professor John Cochrane shared about the historical equity premium. From his Rational Reminder interview @17:00:
One way I like to think about this is: Did your grandfather or great-grandfather know in 1945, that stocks were going to earn on average 8% more than bonds, and he put it all into bonds? Which is what my grandfather did even though he was a stockbroker, wonderful man. I have to work for a living for a reason.

No! Nobody knew this was going to happen. In 1945, all the worthy economists were saying secular stagnation. And the idea that we would have 50 years of the greatest economic growth ever seen, with zeros in front of it, is arguably a surprise. And with it, the stock market returns. Valuation ratios were much lower than, and they kind of do seem to be permanently higher now. A lot of the observed return—this is a great Gene Fama and Ken French paper—a lot of the observed return from 1945 until now comes with the price-to-earnings ratio rising. And if that price-to-earnings ratio rises permanently—which there's good reasons to think it is permanently higher prices relative to earnings: Back in 1945 to own stocks, you had to clip, you had to actually have physical shares and put them in a safe deposit box. Normal people didn't own stocks. Now we have 401(k) plans and index funds, so stock ownership is much more wide.
ETA: Besides the equity premium, bond risk will also reduce the optimal bond allocation. But we can reduce bond risk by duration matching inflation adjusted bonds (TIPS in the US) making bonds something close to a risk-free asset. The risk free asset is one that pays a fixed stream of income for life, and we can approximate that with duration matched TIPS, delaying Social Security, and annuitizing in late retirement. Bond risk need not be as much of an issue as suggested by a historical analysis that does not account for these possibilities.
Last edited by Ben Mathew on Sat Dec 09, 2023 4:57 pm, edited 1 time in total.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by AlwaysLearningMore »

CloseEnough wrote: Sat Dec 09, 2023 12:08 pm
AlwaysLearningMore wrote: Fri Dec 08, 2023 9:44 pm "In theory there is no difference between theory and practice - in practice there is." -- Yogi Berra
Great quote. Not a true Yogiism, however.
Based upon the quote by Einstein, then attributed to Yogi.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by nedsaid »

flylikeanosprey wrote: Sat Dec 09, 2023 11:43 am
nedsaid wrote: Sat Dec 09, 2023 9:10 am As another poster noted, a 100% stock portfolio could run into problems with the sequence of returns phenomenon, a really bad bear market right around a person's retirement date can really wreak havoc to a portfolio.
This kind of thinking is actually directly challenged in the research. Bonds were shown not to be an effective safe harbor in a bear market, and rather international stocks proved to be a better hedge and diversification asset.
There are two takeaways from this study that are useful to investors. First, investors can invest more aggressively than they think they can. Second, diversifying a stock portfolio globally is beneficial to investors.

I do not agree that bonds are not an effective safe harbor in bear markets, most of the time they provide a diversification benefit in a bear market but sometimes they don't. During 2022, bonds were down almost as much as stocks and didn't seem to help at all. Another possible exception would be the Stagflation 1970's. I will say that I lived through two 50% down bear markets, 2000-2002 and 2008-2009, during those bear markets bonds helped my portfolio immensely. It goes to show that it isn't wise to make
absolute "always" or "never" statements about the markets. All kinds of things can happen that seem to violate even the most widely held beliefs regarding investing over shorter time periods. Saying that bonds are not an effective safe harbor in bear markets is an example of an absolute statement.

As far as bear markets, I have been there, done that, and bought that T-Shirt. Something doesn't seem right about the conclusions of the paper even if the math is impressive. Would I have more money today if I had 100% stock portfolios throughout my investing career rather than adding bonds as I age? Looking back, I would say yes. Not sure I could have stayed the course though. This paper seems to not consider the emotional aspects of investing which can be very powerful, or animal spirits as John Maynard Keynes called it. Animal spirits are usually cited in periods of optimism but human behavior can work towards pessimism as well.

I have made the statement many, many times on this forum that as interest rates fell and fell and fell, that the diversification benefits from owning bonds declined. One reason is that when recession hits, interest rates don't have as far to fall. The teeter-totter effect of bonds rising as stocks fall gets to be less and less in a secular bull market for bonds.

Inflation is another factor. Just as declining interest rates are tailwinds for stocks, so is disinflation. No wonder why the stock and bond markets had almost hurricane-like tail winds in the 1980's and 1990's. Conversely, inflation spikes are bad for both stocks and bonds, we saw this during the Stagflation 1970's and in 2022.

So the assumptions regarding Equity Risk Premium, interest rates, and inflation rates are very important. Not sure a high Equity Risk Premium will continue over time, which seems to be a huge assumption behind this study. McQ's study of bond and stock returns in the United States since 1793 shows that sometimes stocks outperform bonds and sometimes bonds outperform stocks. Bill Bernstein has said that over centuries and not just decades that the returns of stocks and bonds are about the same. We have reliable financial data back to the 1600's. There was a smart Aleck who said that Jeremy Seigel's book, Stocks for the Long Run should have been re-titled Stocks after World War II.

Again, I think John Bogle's suggestion that a 65% stock/35% bond portfolio is good for most investors is better advice than advising 100% stock portfolios regardless of age. Good points from the study, but again disaster can strike when otherwise good ideas are taken way too far. 100% stock portfolios just take a good idea beyond what is prudent. Most of us aren't so wealthy that we can ignore 50% or more drops in portfolio value in retirement.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Walkure »

Horton wrote: Fri Dec 08, 2023 9:18 pm I would also point out that TIPS were not available for most of the sample that the authors evaluated. That’s a big deal and I don’t see it mentioned in the article.
I suspect this is a bigger factor than it seems a first blush. We all know that stock has higher expected return, etc. But their whole analysis of unlocking "trillions" over the standard stock-bond mix is including historical data from periods where nominal treasuries had negative real returns over spans of decades. For a retirement spender who is funding living expenses in real terms, it's almost impossible to understate the consumption smoothing advantage that TIPS provide in the overall investment mix, but it will be years in the future before we have enough historical data to conclusively say just how big that advantage was over a variety of 30+ year retirements where "sequence of inflation risk" showed up at different times.
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Sabot »

nedsaid wrote: Sat Dec 09, 2023 7:35 pm Again, I think John Bogle's suggestion that a 65% stock/35% bond portfolio is good for most investors is better advice than advising 100% stock portfolios regardless of age. Good points from the study, but again disaster can strike when otherwise good ideas are taken way too far. 100% stock portfolios just take a good idea beyond what is prudent. Most of us aren't so wealthy that we can ignore 50% or more drops in portfolio value in retirement.
Thank you for that post. It very much resonated with me. I also think a something like Mr Bogle's 65/35 is the sweet spot for a lot of investors.

If the forum had the ability to "thumbs up" I would put two. :thumbsup :thumbsup
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by jaMichael »

Interesting interview with one of the authors on today's Rational Reminder podcast:

https://youtu.be/y3UK1kc0ako?si=SEoudtSnbXV5mfUp
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Mattman25 »

Stumbled here from the Money for the Rest of Us Podcast episode on this paper that was just released today. I am trying to justify this strategy for myself. I see three main pieces of this strategy, please comment if I am missing anything:

1) Anyone pursuing this strategy must have an iron will and always "stay the course" - the mantra of this forum. I found it interesting how many posts in this thread critiqued this point, saying they could not stomach the stock losses, even though most of the comments on this forum are encouraging people to stay the course and "buy the dip" or "buy at a discount". If anyone could stomach the losses, it would be this rational-minded crowd.

2) To alleviate the stress of #1, let's assume the retirement accounts are highly funded, so that even if a 50% loss comes along, the remaining assets should be sufficient. In this case, the individual is more concerned with remaining wealth leftover after death than retirement spending. Surely this would help the investor "stay the course". What I found most interesting in the paper is that the all-equity strategies had a lower failure rate than all other alternatives, and about half the chance of failure as the target date glide path strategy. This would imply this strategy should be chosen even if you did not have abundant retirement savings.

3) The individual must be okay with international exposure. In the case of this paper, 50% of their portfolio in developed ex-US countries. This helps diversify some country-specific risk and relies less on the excellent performance the U.S. Stock Market has seen going forward into the future where that outperformance may not be as certain.

It seems to me, that if you're okay with these three points you should be seriously considering the 100% equity-for-life strategy presented in this paper.
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Ben Mathew
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Ben Mathew »

Mattman25 wrote: Wed Jan 03, 2024 4:21 pm Stumbled here from the Money for the Rest of Us Podcast episode on this paper that was just released today. I am trying to justify this strategy for myself. I see three main pieces of this strategy, please comment if I am missing anything:

1) Anyone pursuing this strategy must have an iron will and always "stay the course" - the mantra of this forum. I found it interesting how many posts in this thread critiqued this point, saying they could not stomach the stock losses, even though most of the comments on this forum are encouraging people to stay the course and "buy the dip" or "buy at a discount". If anyone could stomach the losses, it would be this rational-minded crowd.

2) To alleviate the stress of #1, let's assume the retirement accounts are highly funded, so that even if a 50% loss comes along, the remaining assets should be sufficient. In this case, the individual is more concerned with remaining wealth leftover after death than retirement spending. Surely this would help the investor "stay the course". What I found most interesting in the paper is that the all-equity strategies had a lower failure rate than all other alternatives, and about half the chance of failure as the target date glide path strategy. This would imply this strategy should be chosen even if you did not have abundant retirement savings.

3) The individual must be okay with international exposure. In the case of this paper, 50% of their portfolio in developed ex-US countries. This helps diversify some country-specific risk and relies less on the excellent performance the U.S. Stock Market has seen going forward into the future where that outperformance may not be as certain.

It seems to me, that if you're okay with these three points you should be seriously considering the 100% equity-for-life strategy presented in this paper.
Not necessarily. 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.
Total Portfolio Allocation and Withdrawal (TPAW)
Mattman25
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by Mattman25 »

Regarding #2, Scott Cederburg on the Rational Reminder podcast episode about the paper did mention they played around with different TIPS allocations but it did not work out favorably.
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tre3sori
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Re: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Post by tre3sori »

Ben Felix published a video with the title: "Are Bonds hurting your retirement?".
https://www.youtube.com/watch?v=JlgMSDYnT2o
It is to be viewed as a comment to the "Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice" paper of Scott Cederburg e.a.
The information provided is intended to be entertaining. It is not to be construed as professional advice. Use it at your own risk.
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