Today, we take a closer look at asset allocation through an empirical lens, by drawing on the work and data of Scott Cederburg and his new article ‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’. We unpack what the research tells us about how to establish the optimal mix of assets in a portfolio, the challenges of making the right decisions when you have volatile assets, and why it’s critical that you understand your level of risk tolerance. Next, in our Mark to Market segment, we unpack different types of insurance — like life, disability, and critical illness — and when you should own them personally versus making them the property of your corporation. We then review Justin King’s new book The Retirement Café Handbook: Nine Accelerators for a Successful Retirement before sitting down with the author himself to discuss the content of his latest work and his long-held interest in helping others optimize for retirement. Tuning in you’ll hear Justin share his thoughts on the role of choice, vitality, and joy when it comes to having a successful retirement, the nine accelerators he lays out in his book, and how to become the hero of your retirement story. In our final section, we wrap things up with some wonderful reviews from listeners and our book recommendations. To hear all of the captivating takeaways from today’s episode, be sure to tune in!
Timestamps:
0:00:00 Intro
0:02:32 Main Topic: Asset Allocation
0:10:27 Government Pensions
0:13:05 Is Volatility a Risk?
0:15:35 Empirical Analysis
0:26:17 Bonds as a Diversifier
0:27:06 Behavior Gap
0:32:36 Limitations
0:33:18 Main Topic: Conclusion
0:34:57 Mark to Market
0:43:53 Episode 177: 60 Seconds
0:47:19 Book Review w/ Special Guest Justin King
1:07:14 Aftershow
Links From Today’s Episode:
‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’ —
Episode 224: Prof. Scott Cederburg —
Episode 169: Prof. John Cochrane —
Episode 250: Prof. John Y. Campbell —
Episode 278: Juhani Linnainmaa: Financial Advisors, and the Cross Section of Returns —
Episode 177: Dr. Anna Lembke —
Anna Lembke —
Dopamine Nation: Finding Balance in the Age of Indulgence —
Justin King on LinkedIn —
Justin King on X —
The Retirement Café —
The Retirement Café Podcast —
The Retirement Café Handbook: Nine Accelerators for a Successful Retirement —
Episode 30: Larry Swedroe —
Strangers in Paradise: How Families Adapt to Wealth Across Generations —
Wealth 3.0: The Future of Family Wealth Advising —
Rational Reminder on iTunes —
Rational Reminder Website —
Rational Reminder on Instagram —
Rational Reminder on X —
Rational Reminder on YouTube —
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix —
Benjamin on X —
Benjamin on LinkedIn —
Cameron Passmore —
Cameron on X —
Cameron on LinkedIn — …(read more)
LEARN MORE ABOUT: Retirement Annuities
REVEALED: How To Invest During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
Lifecycle Asset Allocation, and Retiring Successfully with Justin King | Rational Reminder 281
In episode 281 of the Rational Reminder podcast, host Justin Bender discusses the concept of Lifecycle Asset Allocation and its significance in retiring successfully with Justin King, a Certified Financial Planner (CFP).
Lifecycle Asset Allocation is a strategy that involves adjusting the allocation of investment assets based on an individual’s age, risk tolerance, and investment goals. This approach recognizes that investment needs and goals change over the course of an individual’s life, and that the appropriate allocation of assets should reflect these changes.
Justin King explains that Lifecycle Asset Allocation is not just about investing in stocks or bonds, but rather about understanding an individual’s risk capacity and the factors that impact their retirement success. He discusses the importance of accounting for human capital, which refers to an individual’s ability to earn income over their lifetime. As individuals progress through their careers, their human capital decreases, and their need for a more conservative portfolio may increase.
King emphasizes the importance of considering both financial assets and human capital as part of an individual’s overall investment strategy. He explains that understanding the relationship between these two components is critical in developing a successful retirement plan.
Another key aspect of Lifecycle Asset Allocation that Justin King highlights is the role of guaranteed income in retirement. He emphasizes the importance of incorporating annuities and other forms of guaranteed income into an individual’s retirement plan to provide a reliable income stream in retirement.
The conversation also delves into the role of Social Security in retirement planning and how it can be integrated into an individual’s overall investment strategy. King emphasizes that Social Security is a valuable asset that should be managed strategically as part of a comprehensive retirement plan.
Overall, Justin King provides valuable insights into the importance of Lifecycle Asset Allocation and how it can contribute to retiring successfully. By understanding the relationship between human capital, financial assets, and guaranteed income, individuals can develop a more comprehensive and effective retirement plan.
In conclusion, the Rational Reminder podcast episode 281 provides an in-depth exploration of Lifecycle Asset Allocation and its significance in retiring successfully. Justin King’s expertise in financial planning and retirement strategies offers valuable insights for individuals looking to develop a successful retirement plan. By considering factors such as human capital, guaranteed income, and Social Security, individuals can create a more robust and effective retirement strategy.
I’m not in retirement, but as a principal if I were living solely off invested securities I would prefer liquidating shares during uptrends of volatility vs the downside die to giving up fewer shares on a dollar-for-dollar basis. Regarding time-based bond-to-security ratios, I prefer real estate and specified allocation of options trades in non-taxable accounts over bonds.
I always enjoy your material (to the extend I even track it accurately). Either way, I’ll be interested in hearing if you create content on use of margin.
We were raised to not carry debt. Aside from the their first few cars in adulthood and their mortgage, our parents chose living debt free. Later in adulthood, I found the approach mildly ironic. My dad was a mathematician hired into the oil & gas industry prior to computer science degrees. He worked has a computer systems analyst. The irony to me is that the companies he invested in while planning for retirement, all employed debt. I do get it that ‘emotionally’ living debt free yielded non-numeric dividends, yet I gradually began to assume there was an opportunity cost for the actual outcomes of the investment portfolio. The ratio of upmarket trend exceeds down market trending; therefore, a conservative allocation of margin seems rational as long as the investment horizon is long term.
At the end of the abstract the authors make an amusing claim: "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". Surely, if most individual investors go 100% stocks, the prices of stocks and bonds will change dramatically and the analysis in the paper will become irrelevant.
An interesting question would be at what age would switching to the all equity portfolio cause it to underperform the TDF. It's not surprising to me that if you start at 25 and invest for 40 years in 100% equity that you would outperform TDF portfolios. But what if I switch at age 50? Also, what about early retirees? Does the same result apply for someone with a 25-30 working career?
The intro at 2:30 is priceless
This could work..as long as your starting portfolio balance upon retiring was massive, in relation to your cash-flow needs..but most retirees could not withstand the wild volatility in payout amounts, with an all equity portfolio, OR; the sequence of return risk, that it would have.
I had already figured out via simulations that bonds can be risky because of their effect on long-term portfolio growth. And that conclusion turns out to be correct.
But the well known sequence of risk problem occurring in early retirement is important for all-equity portfolios. This risk diminishes as your portfolio grows. I therefore think that having, say, a three-year bond ladder (covering expenses not covered by Social Security) would make sense. This ladder would not be a particular fraction of your portfolio, but tied to your living needs.
Finally, I wish analyses included more asset choices than Total Market index funds.
So interesting the study of Ceterburg. But I wonder if conclusion is the same (100% stock is the best) when starting to invest at 40 years old or 50, instead of 25…? Thanks
Another question I have is whether there is any assumption of having X number of years expenses in cash to avoid having to sell stocks during a downturn?
What about the risk of poor stock performance at the beginning of retirement? This is one of the main reasons I’ve been told that you need bond exposure.
This was a great episode. Many thanks to you both. I was wondering what 'biger drowdowns' mean, does it mean larger withdrawal rate, larger SWR?
The result from Scott's paper reminds me of Javier Estrada's paper called "The Retirement Glidepath: An International Perspective". It examined the success of declining equity, rising equity, and static allocations in actual historical data (not bootstrap) from the Credit Suisse/DMS database.
The best allocation by every measure? 100% stocks. A 100% equity portfolio had the lowest failure rates, best downside protection, highest upside potential, and best average outcomes in US and international markets.
Great episode all around, enjoyed all segments. The main topic was great of course, then Mark's blurb on insurance was very informative, and the guest was super interesting.
This might be your best episode yet.
Looking forward to the next Cederberg episode. Great stuff guys, as it ties into stopping my work after 24 years, but not "retiring". At 58, I think I still have some time left. Thanks, Ben and Cameron!!
@34:11 Yep, yep it was awesome! I was legitimately thinking that aloud when Cameron said it.
Would love your program more if it was in english and I didn't have to decipher every esoteric word you are saying. From the village idiot (me)- what is left tail?
So are you saying that Sequence of Return Risk when one retires and starts withdrawals does not exist? Reverse dollar cost averaging is not a concern?
Even if my consumption goals are met by SS and pension etc, watching a 100% stock portfolio get cut in half during a crash would cause enough stress to actually affect
my health and longevity, which might be beneficial since my money won't have to last as long.
for the 50%domestic and 50% international, do they rebalance annually?
This is definitely an episode I am going to relisten a lot. (That's what happens when I listen as background noise the first time…) Great summary!
Great episode guys!
I've run a few scenarios on Portfolio Visualizer and found no value on bonds except for lower drawdown, like you said.
But, one question: wouldn't a fully domestic Portfolio for U.S. investors (diversified between growth, value and different sizes) have a better outcome than a 50% international? P.S: disregarding drawdown.
Lots of nice stuff here. It's nice to see people finally debunking target date funds and the like as a "default good idea."
However, one thing you guys have never addressed about Cederburg's research (in this paper and the previous) is whether his data set is actually reflective of what a prudent investor would actually invest in. See page 9 of the paper and reference to the prior.
In particular, his bond data seems to presuppose that a prudent investor would invest heavily in the domestic bonds of their home country, even if not denominated in a reserve currency. But that is not what a prudent investor would do; I am sure you would not tell retirees to invest in intermediate and long-term Turkish lira denominated bonds, even if they lived in Turkey. What this data set assumption ends up doing is skewing (or skewering) the value of bonds in a portfolio and making international equities look more attractive than what they are.
A more realistic study would presuppose that a sensible investor would only hold bonds denominated in reserve currencies and would remove non-reserve currency bonds from consideration.
Due to this data problem — which others will eventually discover and will sink these papers in the long run — these results are of limited utility to the extent they are incorporating non-reserve currency bond data.
Have you ever addressed this issue with Cederburg? I am not sure anyone really has because they gloss over the data for the headlines.