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You say AOF isn’t trying to predict the future, isn’t accurately describing the past, and is instead describing what might have been. That is the definition of beyond useless to me.
What do you think of the life cycle (nalebuff/ayers) approach to this? It kind of ties in with dynamic allocation/glidepaths. We all know that higher equities allocation actually gives one the best chance of the longest withdrawal period and highest ending or spending allowance. However, that comes with extreme SORR. You have the majority of your wealth in just the last decade or so.
Supposedly, and the math seems to work, using the life cycle way they espouse and “diversifying across time”, which is a pretty eloquent solution or at least illusion, you have similar downside risks as to a static portfolio, yet the average portfolio and best case scenario results are significantly better than a fixed scenario. Nice, if you can take the 100%+ equity approach. Few can do 200% for considerably long periods of time, but I am trying to think of it as filling up my 80-90% equity bucket first, then filling up bonds right at the end.
I will add the caveat I do not think this is a good strategy for your average retail mom/pop investor. Prudent account management and paying attention to your leverage and having a systematic plan makes sense as well. I dont think there is a single person that can truly take a whole portfolio massive draw down just sitting there, no matter if they understand its early/not much overall % of retirement wealth and they will be better long term. Humans dont work like that, I know I dont. So stops or some kind of less risk or risk off asset makes sense.
I think people do this life cycle investing with real estate. They take on high debt early and gradually pay it off over 15-30 years. Unlike a loan on stocks there isn’t generally a risk of margin call, only default if you lose your job.
In terms of life cycle, you are most able to absorb hits early in your life (before kids) or after they have grown up. Having high debt when you have kids is stressful. Maybe it’s better for your final net worth but may not be worth it.
I can’t see why you can’t take more risk at the end of your life. If you have enough for retirement at age 55, what stops you from taking some of the excess and leveraging it if you want to swing for the fences ? In fact if you have excess for retirement at any age, you can leverage up what you can afford to lose.
Hopefully though you’ll have more experience and not blow up. Taking on margin loan debt at a young age is a sure fire way to blow up. But maybe you’re better off blowing up at a younger age and learning from this than doing this at a later age.
The RE aspect is absolutely true but people dont think of that as leverage of course. This is what people are saying when they say RE is the best path to wealth (those that survived), they are really saying leverage is the best path to wealth. RE has some nice legal and mark to market benefits. Leverage is also the best path to losing it all. Have to be careful.
You dont have to be in debt to get a benefit from the lifecycle idea. A no debt version would be all stocks for the first decade or so, blended in the middle, and all bonds at the end or whatever worked out for your particular allocation.
The point of leverage if you have well enough is actually true and the topic of I thought a Kitces article someone linked a while back. If you took reasonable leverage...who knows, 20%, you wouldnt put yourself in danger and would likely greatly increase your overall wealth. But as we age we get debt averse. Some leverage should not even approach levels that allow one to blow up. I think the article talked about a "prudent" level, but dont recall what they thought that might be. I mean if you were conservative but it made sense to you you could try a risk parity type and slightly lever up the bond side. The point would be to not do to much.
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