Episode 350: Scott Cederburg: A Critical Assessment of Lifecycle Investment Advice

Key takeaways

Investing consistently in diversified international stocks throughout one's life can lead to better long-term outcomes compared to traditional target date funds that favor bonds.
Dynamic portfolio strategies that adapt to market valuations and personal circumstances may enhance investment effectiveness.
Understanding correlations between one's labor income and stock returns can inform better asset allocation decisions.
Conventional wisdom surrounding bond investments and risk management in retirement can be challenged by empirical research and analysis.
The ongoing discourse between academia and practitioners reflects the complexities surrounding lifecycle investing and portfolio management.

Summary

Introduction and Overview

In this 350th episode of the Rational Reminder Podcast, hosts Benjamin Felix and Mark McGrath welcome back Professor Scott Cederburg from the Eller College of Management. The focus of the discussion is the updated version of Scott's paper, 'Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice.' The episode delves into the revisions made based on extensive feedback from academia and practitioners, highlighting crucial 'what if' scenarios added to the research.

Key Findings of the Paper

Scott Cederburg summarizes the key findings from his research. A significant insight is that a lifetime strategy of investing solely in internationally diversified stocks, avoiding bonds, may maximize investment outcomes. The episode discusses the paper's design, including the inclusion of stocks from multiple developed countries and utilizing a block bootstrap method for modeling returns.

Debunking Target Date Funds

The hosts discuss how Scott's findings challenge the status quo of target date funds, which typically recommend a higher allocation to bonds as one approaches retirement. Scott posits that the assumptions underlying these funds may not be optimal, indicating that maintaining a higher equity allocation throughout one's life may yield better results.

Dynamic Portfolio Adjustments

The conversation also highlights Scott's exploration of allowing dynamic adjustments to an investment portfolio based on age and market conditions. The results indicate that even with variable investments, a heavy equity tilt is favored over bonds, especially in retirement.

Effect of U.S. Market on International Portfolios

A focal point of discussion is the importance of the U.S. equity market within global portfolios. Scott discusses various scenarios, including treating the U.S. as a 'special' market and the implications it has for asset allocation in portfolios of international investors.

Impact of Labor Income and Leverage

Scott elaborates on the correlation between labor income and domestic stock returns, showing that as labor income becomes more correlated with stock returns, investors tend to allocate more towards international equities. The conversation also touches on the cautious approach to leverage in retirement portfolios, outlining how borrowing can impact investment strategies.

Academics and Practitioners' Feedback

Scott shares insights into the feedback received from both academics and practitioners on his research. The discussions have sparked heated debates, demonstrating a combination of enthusiasm for the findings and resistance to changing established investment paradigms.

Show notes

Our conversations with Professor Scott Cederburg from Eller College of Management have led to the most heated debates among our listeners! Today, Prof. Cederburg returns to discuss the changes he's made to his paper that was the foundation of previous conversations - 'Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice'. We begin with the data setup and headline findings of the paper before Prof. Cederburg defines "domestic" and "international" as they appear in his paper, why the block bootstrap approach is vital to his work, how and why the results of his paper differ from the status quo, and the evaluation metrics he uses to compare different investment strategies. Then, we explore his optimal base portfolio, the strategy he uses to derive it, how it performs in simulated worst-case scenarios, and how it changes when ditching the bootstrap approach or changing strategies from constant spending to proportional spending. To end, we learn of the importance of including the US in international stock portfolios, how it changes when the US is viewed as special above others, the correlation between labor income and domestic stock returns, and how the reviews of academics and practitioners have changed since the first iteration of the paper until this latest edition.

Key Points From This Episode:

(0:00:00) What to look forward to in today's conversation with Prof. Scott Cederburg

(0:04:49) The data setup and headline findings from his paper, 'Beyond the Status Quo.'

(0:07:01) Defining "domestic" and "international" as they appear in Prof. Cederburg's paper.

(0:08:34) Why the bootstrap approach is necessary for his work.

(0:12:17) How and why the results of his paper differ from the status quo.

(0:15:11) Unpacking the evaluation metrics he uses to compare different investment strategies.

(0:16:05) Exploring his optimal base case portfolio and strategy, and how it performs in worst-case simulations.

(0:23:05) How the optimal allocation changes when households vary their portfolio weights.

(0:27:13) What to consider when ditching the block bootstrap in time-varying optimal portfolios.

(0:29:46) Constant spending versus proportional spending: How the optimal portfolio changes.

(0:30:49) Examining the sequence of returns risk.

(0:42:14) The importance of including the US market in international stock portfolios.

(0:43:40) Why the US is treated the same as any other domestic country in the paper, and how the data changes if it's viewed as special.

(0:51:40) The extent of the relationship between labor income and domestic stock returns.

(0:53:01) How leverage affects optimal portfolio results.

(1:05:20) Assessing how sensitive the paper's results are to risk aversion.

(1:06:35) How academics and practitioners have responded to this paper across all iterations.

Links From Today's Episode:

Meet with PWL Capital — https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemind
Rational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/
Mark McGrath on X — https://x.com/MarkMcGrathCFP

Professor Scott Cederburg — https://eller.arizona.edu/people/scott-cederburg

Professor Scott Cederburg on LinkedIn — https://www.linkedin.com/in/scott-cederburg-0917b0121/

Professor Scott Cederburg on Google Scholar — https://scholar.google.com/citations?user=CZKf3WEAAAAJ

Eller College of Management — https://eller.arizona.edu/

Episode 224: Prof. Scott Cederburg: Long-Horizon Losses in Stocks, Bonds, and Bills — https://rationalreminder.ca/podcast/224

Episode 284: Prof. Scott Cederburg: Challenging the Status Quo on Lifecycle Asset Allocation — https://rationalreminder.ca/podcast/284

Vanguard — https://investor.vanguard.com/

'The Portfolio Size Effect and Using a Bond Tent to Navigate the Retirement Danger Zone' — https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

Papers From Today's Episode:

'Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406

'Is The United States a Lucky Survivor: A Hierarchical Bayesian Approach' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3689958

'Risk-Free Interest Rates' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3242836

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)