The paper titled “Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice” challenges two fundamental principles of lifecycle investing. Firstly, it disputes the notion that investors should diversify across stocks and bonds. Secondly, it questions the common advice that younger investors should hold more stocks than older ones. The study proposes an alternative strategy, advocating for a consistent mix of 50% domestic and 50% international stocks throughout an investor’s life. This approach, they argue, significantly outperforms traditional age-based stock-bond strategies in terms of wealth building, supporting retirement consumption, preserving capital, and generating bequests.
The research assesses the performance of various Qualified Default Investment Alternatives (QDIAs), including target-date fund (TDF) strategies and other balanced, age-based stock-bond strategies. By employing a block bootstrap simulation within a lifecycle model incorporating labor income uncertainty, Social Security income, and longevity risk, the study underscores the importance of maintaining the time-series and cross-sectional properties of stock and bond returns over the long term. The results indicate that a straightforward all-equity portfolio surpasses QDIAs across all retirement outcomes, including wealth at retirement, retirement income, conservation of savings, and bequests. Notably, the proposed 50% domestic and 50% international stocks strategy outperforms TDFs and other QDIAs in achieving long-term appreciation and capital preservation.
The study’s methodology involves simulating the lifecycle of a U.S. couple saving during their working years and consuming during retirement. It employs the age-based heterogenous earnings model of Guvenen, Karahan, Ozkan, and Song (2021), the Social Security Administration mortality tables, and the 4% rule for retirement withdrawals. The investment outcomes are based on historical asset-class returns from developed countries.
An important finding of the research is the economic magnitude of the differences in strategy performance. To match the retirement-period utility of a couple investing 10% of their income in the Stocks/I strategy, a couple investing in the TDF would need to save 14.1% of their income. This translates to a substantial aggregate welfare cost for U.S. investors. However, the Stocks/I strategy often experiences larger intermediate drawdowns compared to the TDF, which is a critical consideration for regulators focused on minimizing the risk of large losses.
The study concludes that despite contradicting traditional lifecycle investing tenets, the Stocks/I strategy dominates due to its superior performance. This conclusion is drawn from a simulation approach that preserves long-term return dependencies and uses a comprehensive dataset of developed country returns. The study highlights the inadequacy of assuming independent and identically distributed returns or relying on short-term return moments, common in traditional lifecycle investing strategies.
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