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:
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.
Tnx.
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.
Frank
Ta1,
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.
Good Luck.
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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