This episode was a revelation ! I read the transcript on your website while Ben was presenting his summary of the article to make sure I understood everything. It is a huge advantage having the written text. I tried reading the original article but it was a bit too long and, while it was very complete, I was really only looking for a summary. Ben did a fantastic job. I had previously heard that 100% stock allocation is best throughout the lifecycle, so I am really glad you made this presentation. Thanks a million, from Paris
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!!
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.
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?
It would be interesting to hear the perspective of Nalebuff and Ayres in the podcast, which challenges both the fixed and age-based distributions for asset allocations in portafolios.
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
Ben please do a simulation along the lines of the one you covered in the asset allocation segment, something along the lines of "AVGV for the long run", to figure out that 100% value allocation for life strategy and how it works out.
It would look better, but we don’t have enough data to do something similar to the paper discussed in the episode. Comparable data do not exist for factor premiums. -Ben
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?
I'm curious how this information could be used to deviate from a traditional asset allocation approach in a shorter time horizon account such as an RESP or FHSA
I just read the paper (and then found this podcast) ... very good summary of it ..... a very interesting paper that goes to the heart of 'what are you paying a fund manager for' ?
You may want to check this out too: Professor Scott Cederburg: Challenging the Status Quo on Lifecycle Asset Allocation | RR 284 ruclips.net/video/y3UK1kc0ako/видео.html
Thanks for great content! As an European we pay in state pension fund (22,8% of salary - caped) and when u treat them like bonds, what I do and also Joe Bogle recommend, in this view u strugly with an 100% stock portfolio to get enough exposure, so I ad commodites😅
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.
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.
I'd be more interested in discussion on the home country bias, especially from the perspective of smaller countries that might be for example only 0.3% of the world total stock market. I'd be a bit uncomfortable holding 50% of my total assets in my home country stock. If my country gets into a deep depression, then I might be faced simultaneously with a triple-threat to both government spending cuts/pension plan, my job security and my stock portfolio. Also ,it's often not clear whether analysts mean home country bias or home currency bias. As someone living in the Euro zone, should I be counting the entire eurozone as my "home country" or just my country itself?
We discuss that at length next week. Scott explains that it's driven by currency, so think Eurozone instead of individual countries, as an example. -Ben
@21:21 I’ve read from diff sources in theory to bal Cdn vs US heavy sectors esp nat resources/our banks vs US growth. Edit: paper advised 35% domestic (Cdn)/ 65% int’l outside of US. In future video can you clarify total allocation would be in Cda, ie U.S.% part of 65% int’l? Diff PWL sources advise some % in GICs/bonds. Still post study? Just took over from advisor to try DIY and working on allocation from many hrs/weeks of research. Edit: diff risk tolerance w/spouses s/b talked about. Im more tolerant then husb. Similar w/women I know (albeit within biz or professions - factor?) Looking fwd to Scott’s new study on retirement. Thx guys.
How do the "success" percentages change if the SWR is lowered to, for example, 2/3%, in which case does the stability given by the bond part increase the success percentage? with a swr of 4% the bond part probably fails to consistently yield that much and therefore lowers the success rate but what happens if we lower the swr?
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.
Left tail = worst outcomes. Left tail of the distribution of outcomes. Based on the data discussed, sequence risk is outweighed by higher expected returns. -Ben
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.
Scott addressed this in the RR community. “Of course large shifts in aggregate allocations will affect prices and affect the aggregate value. This is a first draft designed for raising conversation, I’m guessing we’ll have different aggregate numbers for a peer reviewed version. But with $600 billion in annual retirement savings and many trillions already saved, does anyone really think the aggregate gains will be small even with general equilibrium pricing? The effects are so stark and large that any adjustment in prices won’t fully offset the potential gains. I actually don’t think “trillions of dollars” is too high. I don’t yet have a precise way of saying how many trillions.” community.rationalreminder.ca/t/beyond-the-status-quo-a-critical-assessment-of-lifecycle-investment-advice/25456/23?u=benjamin_felix
@@rationalreminder I appreciate the response. I think, Scott's paper is thoughtful careful scholarship. The objection was not to the amounts, I agree the difference may well be in the trillions if there is a major allocation shift. On the other hand, the market is a zero sum game. If investors really gain trillions due to all-equity long-term allocation, somebody else has to lose trillions. Who will it be? Shorter term investors who cannot afford to wait 30+ years? Pension funds who cannot go all-equity due to regulation? Investors with low risk tolerance? Impulsive investors? Don't these groups taken together describe a majority of the market?
This episode was a revelation ! I read the transcript on your website while Ben was presenting his summary of the article to make sure I understood everything. It is a huge advantage having the written text. I tried reading the original article but it was a bit too long and, while it was very complete, I was really only looking for a summary. Ben did a fantastic job. I had previously heard that 100% stock allocation is best throughout the lifecycle, so I am really glad you made this presentation. Thanks a million, from Paris
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!!
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.
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!
Haha, same here. Our mind do drifting.
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.
Glad you like it!
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?
Link to paper is in description box below video. It’s very detailed.
It would be interesting to hear the perspective of Nalebuff and Ayres in the podcast, which challenges both the fixed and age-based distributions for asset allocations in portafolios.
@34:11 Yep, yep it was awesome! I was legitimately thinking that aloud when Cameron said it.
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.
There’s a paper that looks at something similar and finds a constant allocation optimal. blog.iese.edu/jestrada/files/2016/07/Glidepath-2.pdf
-Ben
@@rationalreminder Hey thanks, Ben! I'll review.
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
We will discuss this question with Scott.
Ben please do a simulation along the lines of the one you covered in the asset allocation segment, something along the lines of "AVGV for the long run", to figure out that 100% value allocation for life strategy and how it works out.
It would look better, but we don’t have enough data to do something similar to the paper discussed in the episode. Comparable data do not exist for factor premiums.
-Ben
@@rationalreminder thank you for the response. 😊
How does this affect someone in their 40s, is it too late to adjust to this strategy?
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?
Bigger peak to trough declines in the portfolio value over the simulation period.
-Ben
@@rationalreminder Thank You.
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?
for the 50%domestic and 50% international, do they rebalance annually?
Paper link in description box under video.
I'm curious how this information could be used to deviate from a traditional asset allocation approach in a shorter time horizon account such as an RESP or FHSA
The intro at 2:30 is priceless
I just read the paper (and then found this podcast) ... very good summary of it ..... a very interesting paper that goes to the heart of 'what are you paying a fund manager for' ?
You may want to check this out too:
Professor Scott Cederburg: Challenging the Status Quo on Lifecycle Asset Allocation | RR 284
ruclips.net/video/y3UK1kc0ako/видео.html
Thanks for great content! As an European we pay in state pension fund (22,8% of salary - caped) and when u treat them like bonds, what I do and also Joe Bogle recommend, in this view u strugly with an 100% stock portfolio to get enough exposure, so I ad commodites😅
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.
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.
I'd be more interested in discussion on the home country bias, especially from the perspective of smaller countries that might be for example only 0.3% of the world total stock market. I'd be a bit uncomfortable holding 50% of my total assets in my home country stock. If my country gets into a deep depression, then I might be faced simultaneously with a triple-threat to both government spending cuts/pension plan, my job security and my stock portfolio.
Also ,it's often not clear whether analysts mean home country bias or home currency bias. As someone living in the Euro zone, should I be counting the entire eurozone as my "home country" or just my country itself?
We discuss that at length next week. Scott explains that it's driven by currency, so think Eurozone instead of individual countries, as an example.
-Ben
@@rationalreminder Great to hear, thanks.
@21:21 I’ve read from diff sources in theory to bal Cdn vs US heavy sectors esp nat resources/our banks vs US growth. Edit: paper advised 35% domestic (Cdn)/ 65% int’l outside of US. In future video can you clarify total allocation would be in Cda, ie U.S.% part of 65% int’l? Diff PWL sources advise some % in GICs/bonds. Still post study? Just took over from advisor to try DIY and working on allocation from many hrs/weeks of research. Edit: diff risk tolerance w/spouses s/b talked about. Im more tolerant then husb. Similar w/women I know (albeit within biz or professions - factor?) Looking fwd to Scott’s new study on retirement. Thx guys.
How do the "success" percentages change if the SWR is lowered to, for example, 2/3%, in which case does the stability given by the bond part increase the success percentage? with a swr of 4% the bond part probably fails to consistently yield that much and therefore lowers the success rate but what happens if we lower the swr?
Bonds make you worse off from 3% through 5% withdrawal rates, which is all they tested in the paper.
-Ben
What a great episode. Tldr is do diversified stocks
Does Cederburg run Monte Carlo analysis on his scenarios?
He ran one million simulated outcomes using a block bootstrap methodology.
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.
Left tail = worst outcomes. Left tail of the distribution of outcomes.
Based on the data discussed, sequence risk is outweighed by higher expected returns.
-Ben
@@precisi0n86
Can also be googled like all else. 😉
@@jamesmorris913
Ben said he was speaking to Canadian public pensions as he didn’t know enough about ss in US to comment.
🤘🏻
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.
Scott addressed this in the RR community.
“Of course large shifts in aggregate allocations will affect prices and affect the aggregate value. This is a first draft designed for raising conversation, I’m guessing we’ll have different aggregate numbers for a peer reviewed version. But with $600 billion in annual retirement savings and many trillions already saved, does anyone really think the aggregate gains will be small even with general equilibrium pricing? The effects are so stark and large that any adjustment in prices won’t fully offset the potential gains. I actually don’t think “trillions of dollars” is too high. I don’t yet have a precise way of saying how many trillions.”
community.rationalreminder.ca/t/beyond-the-status-quo-a-critical-assessment-of-lifecycle-investment-advice/25456/23?u=benjamin_felix
@@rationalreminder I appreciate the response. I think, Scott's paper is thoughtful careful scholarship. The objection was not to the amounts, I agree the difference may well be in the trillions if there is a major allocation shift. On the other hand, the market is a zero sum game. If investors really gain trillions due to all-equity long-term allocation, somebody else has to lose trillions. Who will it be? Shorter term investors who cannot afford to wait 30+ years? Pension funds who cannot go all-equity due to regulation? Investors with low risk tolerance? Impulsive investors? Don't these groups taken together describe a majority of the market?
Very nice confirmation bias