I'm looking for a good article (or book, web site, etc) that discusses
changing your asset allocation as you age, approach retirement, etc.
In particular, I'm looking for 2 things:
1. what are the assumptions underlying this idea?
2. What research has been done to examine this idea, what have the
findings been, etc?
It looks to me like there are some underlying assumptions that are
rarely stated explicitly. I'm wondering if they are right, i.e. have
been investigated empirically.
On Jan 24, 4:22 pm, email@example.com wrote:
ta1, you are asking a good question.
I have seen a number of asset allocation strategies recommended with
no explanation of the basis for the recommendation.
I believe there are a number of factors:
What is your investment goal?
What is your risk tolerance?
Don't put money in the stock market that you need in five years.
What is your planned withdrawal rate?
My goal has been to have as much spendable income when I retire as
before I retire. That requires assuming risks higher than market risk
for at least part of my portfolio. If I were younger, I would put
maybe 90% in stocks to support my goal. However I am within 5 years
so I need a bond "buffer". My planned withdrawal rate is 5% so to
meet the 5 year rule, I need 25% in bonds.
Perhaps you could start with the research of Harry Markowitz. He is
largely considered the "Father of Modern Portfolio Theory". He also
won a Nobel prize for his work.
Couple that with the capital asset pricing model, the efficient
frontier, and the risk/return trade-off (which is part of MPT). My
first three suggestions should give you the ground work for
diversification and asset allocation in general. The R/R trade-off
should explain why we adjust our allocations as our situation changes
(aging, retirement, spending goals, etc are all just situational
changes that affect our risk tolerance). I think you will find all of
the underlying assumptions as you learn the theories.
Someone else here may be more aware of empirical studies outside of
Markowitz's and Sharpe's own work. I, offhand, am not.
I thought this research was historical.
Economists have the performance of each kind of asset class
for the past century.
You suggest a static or dynamic mix,
a withdrawal strategy,
start it at each historical year,
and see how long/well it lasts.
Some brokers have online programs that do this
for you. They'll tell you what percentage last your
life expectancy and beyond.
Another factor to add that has not been explicitly mentioned is
switching from low dividend growth stock to high dividend stock with
slower growth. Depending on life expectancy, a history of dividend
increases, and good business prospects to support the dividend payout
rate, are something very much worth considering. Jeremy Siegel's
"Stocks for the Long Run" covers this with an amazing historical
database and is easy reading.
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