Core Beliefs About Retired Investing

Retired Investing Philosophy

We believe that in addition to diversification across broad asset classes, avoiding large downside losses is also critical to achieving long term investing goals.

Hence, our focus is on identifying asset classes that are dangerously overvalued today, and, at a longer-term horizon, identifying emerging threats that could cause substantial changes in uncertainty and asset class valuations.

Our research is based on the application of complex adaptive systems theory and advanced forecasting methods to macro factors such as technological, economic, environmental, military, social, demographic, and political trends and uncertainties.

We believe that financial markets are filled with positive feedback loops that produce nonlinear effects through the interaction of competing strategies (for example, value, momentum, and passive approaches) and underlying decisions made by people with imperfect information and limited cognitive capacities who are often pressed for time, affected by emotions, and subject to the influence of other people.

Learn more about the beliefs that guide our approach.

Basic Retired Investing Questions

The retired investing process begins with your answers so some basic questions that drive your decisions about whether to annuitize some of your savings, and how to allocate your portfolio across different asset classes.

These include how much income you'll need in retirement, what your savings goals are, and how long you expect to live.

This is the logical place to start exploring our free materials.

Asset Allocation and Model Portfolios

While attracted to equilibrium, we believe that financial markets are best described as adaptive systems that never reach it. When they are operating far from equilibrium, substantial over and undervaluations are the usual result.

In contrast, traditional mean-variance optimization is based on an underlying assumption that markets generally operate in or close to equilibrium. This is why this approach often produces disappointing portfolio results.

Our benchmark model portfolio is equally allocated between broad asset classes in order to capture the underlying system and social drivers of financial market returns.

We seek to avoid large losses by tactically adjusting our benchmark portfolio on the basis of current asset class valuations and our monthly global macro forecast. On rare occasions (such as our assessment of the risk posed by the SARS-CoV-2 coronavirus) we issue more urgent warnings.

At the end of 2003, we established
model portfolios for retired investors seeking to maximize the probability of earning different levels of long-term compound real returns, within given risk limits. In this section, we present their results through the end of 2019.

Learn more about asset allocation.

Active vs Passive Investing

Once you've determined the asset allocation that has the highest probability of achieving your long term return goals, you have to implement it via the investments you choose for your portfolio.

At this point, the most important question you have to answer is the the mix of active and passive investments you will use to implement your asset allocation.

In fact,
we wrote a book about the arguments on either side of the active versus passive question.

In a nutshell, the active investor believes that he or she can regularly generate (or choose fund managers who can generate) returns that are above the returns generated by a passive benchmark portfolio, due to a mix of information and/or forecasting skill (i.e., an "edge") that is superior to that possessed by other active investors.

In contrast, the passive investor wants only to match those benchmark returns at the lowest possible cost.

Confusingly, index investing can be either active or passive.

Learn more about active, passive, and index investing.