Agree with the general advice, and I’m particularly intrigued by the idea of how EAs should be less risk-averse than the general population, or should otherwise adopt different strategies than other rational investors.
You speak of how we can get very similar value by buying the Nth vaccine (versus the Nth car), which makes a lot of sense. Another approach would be to just save less, hold these minimal retirement assets in safe instruments, but give the remainder to an organization or your own charitable trust earlier in a very aggressive manner.
I have this vague idea that it’s probably best to save until an aggressive high-stock portfolio that performs particularly poorly could still cover expected lifetime living expenses, and then to give away any additional funds over and above this amount.
Probably the biggest drawback to this approach is that it invites the temptation to consume excessively. It may be better to starve ourselves of this excess capital by signing it over to the organizations we most trust.
Another argument for some readers investing aggressively in this particular case is that if you are young (which many of you are), you can afford to hold assets for a lot longer. Risky assets tend to be a lot less risky over long time periods. For example, on any given year, stocks have a fairly high chance of performing worse than bonds, but (IIRC) stocks have performed better than bonds over every 30-year period since the beginning of the 20th century—even if you bought stocks right at the peak in 1929. If you can afford to hold your assets for 30 years without selling, you can be more aggressive.
Even the most aggressive allocations offered by Wealthfront and Betterment are still conservative enough that any young person with no large need or cash in the medium-term future should feel comfortable with them.
stocks have performed better than bonds over every 30-year period since the beginning of the 20th century
Non-overlapping sample size = 3
This is not just a nitpic. I do not think your central claim, that riskiness declines with time horizon, is true outside of some special cases. If you have other arguments for this I would be happy to discuss them.
I do not think your central claim, that riskiness declines with time horizon, is true outside of some special cases. If you have other arguments for this I would be happy to discuss them.
The obvious argument is the Central Limit Theorem. Unless you want to argue that the log-variance of stock movements is secretly infinite, which seems doubtful.
Yes your average return will mean revert but I do not think there is any reason to think total wealth will revert to trend. e.g. if SPY falls by 10% this year, there is little to no catch up growth in future, though obviously future positive returns will dilute the 10% drop.
My recommendation to use the maximally aggressive allocation may not be reasonable for everyone, but my impression is that it’s the best for most EAs. Do you disagree about this?
You may be right here—I haven’t researched this claim much. It’s also true that stocks performed unusually well during the 20th century and that this may not continue.
Agree with the general advice, and I’m particularly intrigued by the idea of how EAs should be less risk-averse than the general population, or should otherwise adopt different strategies than other rational investors.
You speak of how we can get very similar value by buying the Nth vaccine (versus the Nth car), which makes a lot of sense. Another approach would be to just save less, hold these minimal retirement assets in safe instruments, but give the remainder to an organization or your own charitable trust earlier in a very aggressive manner.
I have this vague idea that it’s probably best to save until an aggressive high-stock portfolio that performs particularly poorly could still cover expected lifetime living expenses, and then to give away any additional funds over and above this amount.
Probably the biggest drawback to this approach is that it invites the temptation to consume excessively. It may be better to starve ourselves of this excess capital by signing it over to the organizations we most trust.
Another argument for some readers investing aggressively in this particular case is that if you are young (which many of you are), you can afford to hold assets for a lot longer. Risky assets tend to be a lot less risky over long time periods. For example, on any given year, stocks have a fairly high chance of performing worse than bonds, but (IIRC) stocks have performed better than bonds over every 30-year period since the beginning of the 20th century—even if you bought stocks right at the peak in 1929. If you can afford to hold your assets for 30 years without selling, you can be more aggressive.
Even the most aggressive allocations offered by Wealthfront and Betterment are still conservative enough that any young person with no large need or cash in the medium-term future should feel comfortable with them.
Non-overlapping sample size = 3
This is not just a nitpic. I do not think your central claim, that riskiness declines with time horizon, is true outside of some special cases. If you have other arguments for this I would be happy to discuss them.
Otherwise, I recommend The long-term risks of global stock markets
The obvious argument is the Central Limit Theorem. Unless you want to argue that the log-variance of stock movements is secretly infinite, which seems doubtful.
Yes your average return will mean revert but I do not think there is any reason to think total wealth will revert to trend. e.g. if SPY falls by 10% this year, there is little to no catch up growth in future, though obviously future positive returns will dilute the 10% drop.
Oh, huh, you’re right—the relative log-variance of a product of iid lognormals shrinks, but the relative variance doesn’t. TIL, thanks!
My recommendation to use the maximally aggressive allocation may not be reasonable for everyone, but my impression is that it’s the best for most EAs. Do you disagree about this?
The maximally aggressive strategy is to lever up 10x and bet on momentum!
I think there are credible arguments for this view, but these are mainly about EAs having low risk aversion, not the strategy being low risk.
Really the sample size is closer to 4 ;)
You may be right here—I haven’t researched this claim much. It’s also true that stocks performed unusually well during the 20th century and that this may not continue.