Professor Scott Cederburg: Challenging the Status Quo on Lifecycle Asset Allocation | RR 284

Episode Overview

• Professor Scott Cederberg discusses his new research paper which challenges the conventional wisdom of de-risking a portfolio into retirement.
• The core finding reveals that a 100% globally diversified equity portfolio historically outperforms traditional target-date funds on nearly every long-term metric, including safety (lower probability of running out of money).
• The conversation redefines risk over long horizons, suggesting that while stocks are volatile short-term, their higher real returns make them safer for multi-decade retirement periods than bonds.
• A critical theme is the immense behavioral challenge of this strategy, as its success depends entirely on an investor's ability to stay the course through severe market crashes without selling.
• The discussion highlights how traditional retirement advice may be based on flawed modeling assumptions that ignore real-world asset return behaviors and use biased historical data.

Key Concepts

• Challenging Conventional Wisdom: The episode centers on research that uses comprehensive historical data to question the long-held advice that investors should reduce equity exposure as they approach and enter retirement.
• Superiority of All-Equity Portfolios: A globally diversified, 100% equity portfolio is shown to result in greater wealth, larger bequests, and, counterintuitively, a significantly lower probability of ruin compared to typical age-based strategies like target-date funds.
• Redefining Risk for the Long Term: The properties of asset classes change with the investment horizon. Bonds, often seen as "safe," become riskier over a 30+ year retirement due to low real returns, while stocks, despite short-term volatility, prove safer for maintaining long-term consumption.
• The Behavioral Challenge: The primary obstacle to implementing an all-equity strategy is psychological. Investors must be able to withstand severe drawdowns (e.g., 50% declines) without panic selling to realize the superior long-term returns.
• Flawed Modeling Assumptions: Conventional retirement advice often relies on models using US-only data (which has survivorship bias) and assumptions that ignore real-world return dependencies like mean reversion, leading to suboptimal conclusions.
• The Practical Cost of De-Risking: Choosing a traditional target-date fund instead of an all-equity portfolio has a significant cost, requiring a much higher savings rate (e.g., 14.1% vs. 10%) or supporting a much lower safe withdrawal rate (e.g., 2.3% vs. 3.4%) to achieve similar outcomes.
• Optimal Home Bias: Research suggests an optimal portfolio for a retiree includes a significant allocation to home-country stocks (35-50%) to help hedge against local inflation.

Quotes

• At 2:06 - "It's incredible... and it challenges some of the sort of fundamental, traditional wisdom of retirement planning and asset allocation." - Benjamin Felix emphasizes the significant and disruptive nature of the paper's findings.
• At 25:30 - "[The 50/50 internationally diversified equity strategy] has an 8% ruin probability... so it's like half of the ruin probability of the TDF." - Scott Cederburg quantifying the dramatic difference in failure rates between the two strategies.
• At 39:50 - "You would have to save 14.1% with the TDF throughout your entire life [to get the same happiness in retirement as saving 10% in an all-equity strategy]." - Scott Cederburg highlighting the significant "cost" in required savings for choosing a more conservative strategy.
• At 51:33 - "People are going to have to actually just sit there while their retirement account is crashing and not respond to it. But that's sort of what has to be done in order to realize these gains." - Scott Cederburg explains the extreme behavioral discipline required to capture the high returns of an all-equity strategy.
• At 54:39 - "Super, super important." - Scott Cederburg's response when asked how important capturing real-world return dependencies like mean reversion are to his results.

Takeaways

• For long-term investors, a 100% globally diversified equity portfolio may actually be "safer" than a traditional stock/bond mix in terms of achieving retirement goals and preventing ruin.
• The single greatest risk to an all-equity strategy is behavioral; its success is entirely dependent on having the discipline to stay invested through severe market downturns.
• Conventional retirement advice, particularly the glide path used in target-date funds, may be based on flawed models that do not accurately capture long-term historical asset class behavior.
• The asset allocation decision has a massive impact on retirement outcomes, potentially requiring a 40%+ higher savings rate to compensate for the lower returns of a more conservative strategy.