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Quite good lecture about how you can start saving money for your retirement. But, the examples from the book are about US only, of course. Nonetheless, there are some good common tips how you can deal with saving. When you should invest like a crazy in stocks and when not, for instance. William J. Bernstein This book describes three stages of a typical investor.
Personally I think the advice in the beginner phase is not necessary and too complex. A young investor would benefit from the plainest boglehead philosophy.
The end stage where he describes the TIPs ladder is why I purchase the book but personally I think having a 30year TIPs ladder is also courting disaster. It seems like these days people use TIPs to bridge the years before getting social security and that’s a more prudent approach.
So TLDR some intermediate topics but I don’t think you want to apply the advice there literally. William J. Bernstein Life Cycle Investing Understanding is Critical
Bill Bernstein explains with ease the beginning, middle, and end stages of life cycle investing and how our working lives are often dependent on the demographics and timing of our birth year and, more importantly, the point in the market cycle we begin to work. William J. Bernstein The first book in Bernstein’s “Investing for Adults” series is for those already “familiar with Gene Fama, Zvi Bodie, Jack Bogle, and Burton Malkiel, and understand that a mean variance optimizer does not blend vegetables.” At 43 pages it is more of a monograph than a book. It is not intended for the general public, but rather for practiced investors, financial practitioners, financial theorists, and perhaps some regulators and policy makers. Of the aforementioned groups, financial practitioners will find it most useful.
Bernstein focusses on three ages: young investors; middle age; and retirement. Because of their considerable human capital, “it’s virtually impossible for young workers to employ their capital too aggressively, he says. Bernstein then highlights various methods to actually increase risk above that of a 100% equity portfolio: leverage and leveraged funds; options; and tilting equity holdings to small value stocks (following Fama & French), plus some exposure to emerging markets.
Using historical data, the strategies would have worked well, but Bernstein cautions that beginning investors are more risk averse - they have less experience and less wealth (greater wealth increases risk tolerance, Bernstein claims) - and are unlikely to stomach his prescription.
Bernstein also spends some time on the math involved, and unfortunately, even with a long time horizon the strategy he recommends is not foolproof. Risks experienced in multiple time periods over a long time horizon multiply, not cancel out. “The probability of semi-bad outcomes decreases over time, but the probability of very bad outcomes increases.”
For those who are truly risk averse, Bernstein notes that it is likely impractical for them to save using purely risk-free assets. If you want 30 years of retirement, and you want to do it with ... Treasuries ... you'll need to save half of your salary during the three decades you are working. Yikes - an even worse outcome than the uncertainty and volatility inherent in the leveraged equity prescription.
Further, most return scenarios work best starting with a lump sum rather than an ongoing series of periodic investments (in particular when there’s a high equity risk premium). Alas, large lump sums are, inheritances aside, beyond the reach of most young investors. As Churchill is reported to have said, “saving is a very fine thing, especially when your parents have done it for you,” but even then the inheritance often comes in middle age.
Bernstein tackles retirement next, leaving the middle years to last. Those preparing for retirement should first look to hedge as much risk cash flow as possible (liability matching) beyond any defined benefit pension plans they may already have, using annuities and TIPS, and by deferring social security (an incredible deal, Bernstein says).
As for the balance of retirees’ investments, in volatile markets the need for regular withdrawals poses a challenge opposite to the ‘dollar-cost-averaging’ opportunity presented to young investors. Bernstein warns If you've counted on your stock holdings to see you through retirement, you're likely to be seriously disappointed. Even balanced investors need to take note. “The theoretical retiree who began to draw down on his or her nest egg at a real rate of 7% on January 1, 1966 ran out of money in about 13 years, no matter what his or her stock/bond mix was. Yikes again.
The middle years are harder to pin down, and Bernstein wisely leaves advice to this group to the end. So much depends on the results of the earlier years (excess or deficiency of savings) and one’s target retirement age and life expectancy - in essence a residual of the younger and older plans.
Bernstein draws on the good work of other authors, and cites frequently from CFA Institute’s Financial Analyst Journal. His retirement scenarios are illustrative and draw together well much of the work presented earlier in the book.
Despite the book’s many strengths, Bernstein unfortunately ignores the impact of taxes on different asset classes and the significant impact this will inevitably have on compound growth or spending. As well, he is selective with his input numbers in order to underscore points. In one example he shows the impact of three different real yields on the depletion rate of a portfolio. In another, he cites the impact of a 3% inflation rate. Why three variables in the first example and one in the next, emphasizing variability in the first case but certainty in the second.
Ages of the Investor is thought provoking, and a reminder of how capricious are many of our modern retirement assumptions. The sobering reality is that many, many people will not save even close to what they need to retire in the manner they've become accustomed to. And like our early years’ risk aversion, Bernstein notes that in our accumulation years we succumb to hedonistic needs - a desire to ‘keep up with the joneses’ - which makes it even more difficult to forgo current spending and save enough for retirement. With the vagaries of future inflation and market returns, striking an optimal portfolio mix is a challenge for even the most thoughtful investors. Bernstein’s book, at least, will help set readers on the best possible path. William J. Bernstein A concise explanation of how investing strategy differs in the early, endgame, and mid-stage of the investor's lifetime.
It is a good companion to the Deep Risk book by same author. William J. Bernstein
3.3/5 (Good) William J. Bernstein Great summary of how an investor's asset allocation could change during his or her lifetime. Part of the investing for adults series. William J. Bernstein Highly technical, but good to read if you have a working level understanding of finance. William J. Bernstein
The Ages of the Investor: A Critical Look at Life-cycle Investing is intended to be the first installment in the Investing for Adults series. Just as grown-ups do not believe in the Tooth Fairy, the Easter Bunny, or Santa Claus, “Investing adults” know that there is no such creature as the Stock-picking Fairy or the Market-timing Fairy. Further, there is no Risk Fairy who will write you cheap options that will protect your stock holdings against loss. Investing adults are familiar with Gene Fama, Zvi Bodie, Jack Bogle, and Burton Malkiel, and understand that a mean variance optimizer does not blend vegetables. In other words, this series is not for beginners. Future topics will, with luck, include the limits of market efficiency and diversification in increasingly non-segmented global markets. The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults)
