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Short Summary
Main recommendation: Rethink the conventional life cycle asset allocation advice that shifts portfolios toward bonds with age, because a research paper ("Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice") found that a 35% domestic and 65% international stock allocation held across the full life cycle outperformed target date funds, age-based strategies, and balanced portfolios on wealth accumulation, retirement spending, and bequest outcomes. The video argues that stocks may be less risky than conventional wisdom suggests for long-term investors, while bonds can be riskier over long horizons.
Key Points
- The conventional approach relies on volatility as the measure of risk, but Ben Felix argues that for long-term investors risk should be measured in part as the probability of not meeting future consumption goals.
- Stock expected returns tend to rise after prices fall, so mean-reverting behavior reduces the long-horizon risk of stocks.
- Over 30 years, bonds were found to be riskier than stocks, more correlated with stocks at long horizons, and to have worse purchasing-power downside risk, with weaker recovery after crashes.
- Adding 5 to 10% bonds to an all-equity portfolio produced worse simulated outcomes, despite the diversification intuition.
- The all-equity result held at 3, 4, and 5% withdrawal rates and improved left-tail (worst-case) retirement outcomes and the chance of not running out of money.
Details Worth Noting
- Concrete instructions:
- Use a 35% domestic and 65% international stock mix for the full life cycle, from early savings through retirement, as the study's optimal result.
- For non-US investors, the domestic share refers to local-currency stocks: a Canadian investor would hold 35% Canadian stocks, and a Dutch investor 35% Eurozone stocks.
- Assess your psychometric risk tolerance, your capacity to endure short-term declines, and your composure during past market volatility before adopting a high-stock allocation.
- The study modeled a US couple saving 10% of income from age 25, retiring at 65, receiving Social Security, and drawing down with the 4% rule.
- The study modeled a US couple using about 1 million simulated return scenarios drawn from data covering 38 developed countries and roughly 2,500 years of country-month returns from 1890 to 2019.
- The video notes that the advantage of all-stock portfolios is bought with higher volatility and larger average drawdowns, which can cause poor investor behavior and performance drag.
- Caveats include that historical data may not represent the future, the equity risk premium may have declined as markets became more accessible and regulated, and many investors cannot tolerate 50% drawdowns.
- The video mentions a notable home country bias implication for investors in many countries, including Canada, which it says it will address in a separate video.
Bottom Line
Bonds are not automatically the safe default that conventional life cycle advice assumes, but the video stresses that any high-equity strategy only works if the investor can psychologically endure significant volatility and drawdowns.
