Tuesday, April 20, 2010

Quote(s) of the day


Two Yale geniuses have found a way to "better diversify risk across time," when investing for retirement.

The dilemma they face is that young people in their 20's have less money in their retirement accounts, than they will have in that account in their 50's and 60's. They lose out when the market has big growth in their 20's and the young folks are "under-invested."

So what might they propose...leverage!

You really wonder what these two would say to a 26 year old who took his $15k bonus and levered up and plowed into the market in late 2007, later to be stopped out with nothing left. What does he do, just keep happening upon money and employing more leverage?

You are advocating that people in their 20s and early 30s take all their retirement savings and buy stocks on margin. Can you explain why that's not as crazy as it sounds?
Ayres: It's not as crazy as it sounds because it helps people better diversify risk across time. It would be really crazy if you only invested in the stock market one year of your life, because that could be a really bad year. That could be 2008. People do have the right intuition — that it's better to spread exposure to the stock market over time. The problem is, having just a few thousand dollars in the market in your 20s doesn't give you very much diversification across time when you have hundreds of thousands or millions of dollars in the stock market in your late 50s and 60s.
Nalebuff: Another way of saying it is, we believe in stocks for the long run, but most people, when they have lots of stocks, don't have the long run, and when they have the long run, don't have lots of stocks. People seriously underinvest in the market for the first 25 years of their working life.

But when you're 22 years old, you just don't have the cash.
Nalebuff: You don't have money, so the only way to have more exposure to the market is to employ a little leverage. It may be leverage, but it's not on a lot of money, and it's also not a lot of leverage. Unlike a house, which you might buy on 10-to-1 leverage or 20-to-1 leverage, here we're only talking about 2-to-1.

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