Thursday, January 19, 2012

Game Over

I am clearly copying Carl Richards' gimmick at The Behavior Gap. I hope he thinks that imitation is the sincerest form of flattery.  Here is the story... 

Before retirement, the focus is usually on investment returns within what is reasonable with regard to one's willingness and ability to take risk. Meeting specific goals should be better integrated, so that the investment strategy doesn't take more risk than necessary. But at the end, the focus is on returns.

After retirement, maximizing returns need to longer matter so much. Retirees want to ensure that they have a steady stream of income for as long as they may live. Whereas before retirement one has more chance to recover from a market drop, such that a high returns / high volatility strategy may be more feasible, recovering from a market drop can be much more difficult after retirement. High portfolio volatility can be just as much of a concern as low portfolio returns. More volatility increases the chance that your portfolio hits zero. Then, it's game over! Once your wealth runs dry, there is no reset button (I hope video game analogies are not lost upon prospective retirees).

A low returns / low volatility strategy may not really be so bad for retirees. Certainly, the recommendations for 50-75% stocks coming from the early safe withdrawal rate studies need not be heeded [that is partly an artifact of the overweighting of the prolonged bear market for bonds between the 1950s and 1980].  This is one of the themes explored in my article from the January 2012 Journal of Financial Planning, "Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates."


  1. That's why in Indonesian pension fund regulation, we still put cap for stocks & other risky assets.


    1. Thanks Bayu. One of the implications of this is perhaps the regulations should be different for the pre- and post-retirement phases.

  2. Good drawings, Wade! For those who want to be conservative with their investments, I wonder if it also makes sense to consider annuity-type products--income annuities, low-cost VA/GLWBs, or longevity insurance as alternatives to all-bonds as the safe investments. Such products would help overcome the longevity risk inherent in heavy fixed income allocations, i.e. where fixed income may be very safe up to life expectancy, but fall off a cliff for longer lives.

  3. And now there are low volatility ETFs on the market - SPLV, USMV, IDLV, EFAV, EELV, EEMV, ACWV and TSX: ZLB. I just took a look at them and there seems to be good research backing up such a notion. see