Credit: Shutterstock photoBy SA Gil Weinreich :
Alexandra Macqueen, an author I follow, offers perspective on retirement saving for those lacking a defined benefit pension in her latest article appearing in today's Globe and Mail.
In essence, she explains that there are different methods of preparing for this financially unique period in the life-cycle. We've previously discussed these various approaches in this forum, but her article occasions a chance to review this critical topic.
The conventional approach is based on stock-heavy portfolios. Its intellectual underpinnings were popularized by Jeremy Siegel's book, "Stocks For The Long Run," the basic idea being that high-risk, high-return investments most match the goal of funding a high-ticket item (i.e., retirement) with a long time horizon. This is the conventional wisdom, if there ever was one. Indeed, Macqueen writes, citing York University finance professor Moshe Milevsky, that Wall Street has a financial incentive to prefer this approach:
A second view, rarely voiced on Wall Street but with near universal support in academia, is quite opposite stocks-for-the-long-run but, to the contrary, counsels safety above all. Boston University professor of management Zvi Bodie is the exemplar of this view, which he bases on well established finance theory holding that risk increases rather than decreases with time (by risk we refer to volatility in total return rather than annualized return).
The above point is often hard for investors to digest, and it goes against everything they read or learn from industry sources, but as mentioned, it is well founded. The key difficulty, for those who desire to avoid the risk being warned about, is that it requires very different and very difficult behavior change. Macqueen quotes financial advisor Jason Pereira on the key implication of this view:
For those who have already saved inadequately, this more cautious approach seems a bridge too far.
However, Macqueen brings a third view - that of Moshe Milevsky - on how much risk to take in saving for retirement. Milevsky's key insight is that financial advice must be customized to each individual's unique needs. While his approach is rooted in Bodie's academic risk-averse model, Milevsky nevertheless points out that individuals' finances tend to be either bond-like or stock-like. If you receive a steady monthly income (i.e, you're a salaried employee), then you're a bond and you can afford to take more risk (via the volatility of stocks) than, say, an entrepreneur whose income fluctuates and who should therefore complement that volatile income with safe, fixed-income investments.
While my own knowledge of finance is dwarfed by these giants - Bodie, Siegel and Milevsky - I think it relevant for me to add my regular refrain that a tripod of different risk levels via a roughly equal-weighted portfolio of stocks, real estate and cash could serve as a difference-splitting fourth method of retirement saving that ensures participation in the possibility of gain with the safety needed to wait out periods of loss.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
