On the Glidepath Strategy for Retirement and the “China Study”-Part III!

From Aditya Rana


It is never too early to start saving for retirement, and a regular saving schedule starting with your first pay check is the most prudent strategy to build a sufficient nest egg for eventual retirement. In addition, having an appropriate investment strategy is important with the general conventional thinking being that young people should be investing more in stocks and older people should favour bonds. This rests on the premise that younger people have modest savings and a longer period over which to recover any losses from a bear market, while older people want greater certainty and less risk that a decline in the value of their savings will alter their retirement plans. Has this method worked on a historical basis? To address that question I present below a recent note from Rob Arnott who runs Research Affiliates, a fund management and advisory company, and is a true “out-of-the-box” thinker and thought-provoking analyst:

-The “Glidepath” approach to retirement planning involves transitioning gradually from an equity-centric portfolio in the initial years to higher allocations to bonds over time as a means to reducing risk to the planned spending power in retirement.

-However, this premise is flawed and does not stand stack-up against historical experience, using 141 years of markets data (from 1871), with the first person starting work in 1871 and retiring in 1911 and the last person starting work in1971 and retiring in 2011. During this period stocks returned 8.3% per annum and bonds 3.9%.

-Comparing the experiences of three investment strategies, with the assumption that $1,000 a year in real terms is invested each year: 1) the “prudent approach” where the portfolio starts with a 80%/20% mix in favour of equities and gradually shifts to end with a 20%/80% allocation in favour of bonds, 2) the “balanced approach” with a constant 50/50 mix, and, 3) the “contrarian approach” which shifts from a 20/80 mix to end with a 80/20 mix.

-Comparing the ending retirement assets for each option: the “prudent approach” ends with a portfolio average of $124,460 on a total investment of $41,000 (in real terms) which implies a tripling of the real purchasing power of the investments. The “balanced approach” ends with an average value of $137,870 (10% higher) , while the “contrarian approach” ends with a value of $152,060 (22% higher).

-Comparing the results in terms of range of outcomes: the “prudent approach” would have had a maximum value of $211,330 and a minimum value of $49,940, the “balanced approach” would have had a maximum value of $209,110 and a minimum value of $51,800 and the “contrarian approach would have had a maximum value of $286,920 and a minimum value of $53,040.

– Another way to look at the variability of outcomes: the “prudent approach” would have had with 2.4 times more wealth at the 90th percentile than the 10th percentile (i.e. the likely range) with a standard deviation of $37,670, the “balanced approach” would have had a ratio of likely outcomes of 2.34 and a standard deviation of $41,250 , while the “contrarian approach” would have had a ratio of likely outcomes of 2.87 with a standard deviation of $57,010 (i.e. more uncertainty of outcomes in later years but upside uncertainty.)

-In addition to the ending assets at retirement, it is important to look at how large a lifetime inflation-indexed annuity can be purchased with these assets on retirement to produce regular retirement income. On average, the “prudent approach” would have purchased an annuity of $7,730 per annum, while the “balanced approach” an annuity of $8,550 per annum and the “contrarian approach” an annuity of $9,440 per annum. Again the range is wide but the minimum and maximum values, as well as the ratios of the likely outcomes, would increase as the strategy got more aggressive.

-It could be argued that this result is due to the higher real returns for stocks and bonds later in the 141 year period, thus favouring investors who ramp up risk in later years. However, the strategies deliver the same relative rankings if the returns for each year are randomly drawn.

-If the best stock market returns come in the early part of the strategy then the “prudent approach” will offer superior relative returns and if the best stock market returns come in the later years, the “contrarian approach” will offer better relative returns. However, it is hard to predict whether stock market returns will be better early or late during the investment period.

-Given the current environment of low expected returns on stocks as well as bonds, the analysis can be adjusted to reduce the average historical bond market return by 2.0% to 1.9%and the average stock market return by 2.9% to 5.4% (by comparing the historical average yields and current yields for stocks and bonds and then reducing the returns by the implied capital gains and yield differentials embedded in historical returns).

-The “prudent approach” would have ending average assets of $69,320 with a likely range of $40,760 to $99,670, the “balanced approach” has ending average assets of $75,560 (9% more) with a likely range of $42,120 to $101,440, and the “contrarian approach” would have average ending assets of $81,990 (18% more) and a likely range of $43,150 to $121,020. Please note that the lower end of the likely range under the “prudent approach” is less than the total lifetime amount invested.

-The late economic historian and consultant Peter Bernstein was fascinated in the distinction between risk (“known unknowns”) and uncertainty (“unknown unknowns”). The range of outcomes in the first part of the analysis above is risk as the breadth of the range is predictable but not where our experience may lie, while the difference between the first part of the analysis and the return-adjusted analysis is uncertainty for those investors who choose not to accept the current reality of low returns.

-Investors who are prepared to save aggressively, spend cautiously and work a few years longer are likely to be fine. Those who do not follow this path are likely to suffer disappointment. In addition, a traditional “Glidepath” strategy is likely to be inferior to a balanced or contrarian approach.

Fascinating analysis which has particular relevance today in an environment of low expected returns with high prospects for future inflation and an ending of the 30 year bull market in bonds. Gradually increasing equity weightings, at the expense of developed country bonds, with a focus on EM equities (which offer superior expected return), commodity and commodity stocks (as a hedge against future inflation), developed market high quality multinationals, EM local currency bonds (as a hedge against inflation and higher current yields) and real assets like land and gold would be appropriate. Lastly, dynamically rebalancing portfolios based on asset valuations in a disciplined manner would ensure that you are “buying low and selling high over time.

The China Study – Part III (Prof Colin Campbell, Cornell University):

To follow-up on last week’s newsletter which summarised the first part of the chapter titled “Turning off Cancer” , I summarise below the second part of the chapter:

-In addition to high protein diets being related to a higher development of Foci cells (precursor cells to tumour growth), additional animal experiments demonstrated that if we are exposed to a carcinogen that initiates some cancer in the past, this cancer can be “reawakened” by an intake of high protein later on.

-In the animal (rat) experiments which were fed a carcinogen, cancer did not develop until about 10% of dietary (milk) protein, but increased dramatically with higher intakes of protein.

-In addition, intake of a 20% protein diet based soy or wheat protein did not result in higher Foci cell development like the diet with high milk protein (casein).

-The above findings were similar when the studies were extended to the lifetime of the animals , with the rats fed 5% protein diets being all alive and cancer free in 2 years (despite being fed the carcinogen) and the rats being fed 20% protein diets all getting cancer.

-Additionally, animals which were switched from a high-protein diet (20%) to a low-protein diet (5%) had significantly less tumour development (35-40% less).

-Casein (milk protein) affects the way cells interact with carcinogens, the way DNA interacts with carcinogens and the way cancerous cells grow.

-The studies on rats are relevant to humans because: 1) rats and humans have an almost identical need for protein, 2) protein operates in rats virtually the same way it does in humans, 3) the level of protein intake causing tumour growth is the same level that humans consume, and, 4) in both rats and humans, the initiation stage is far less important than the promotion stage of the cancer. We are likely dosed with carcinogens in our daily life, but whether they develop into tumours depends on their promotion or lack thereof.

-Further studies done by them and others, demonstrated that nutrition to be far more important in controlling cancer than the initial does of the carcinogen, and nutrients from animal-based foods increased tumour development while nutrients from plant-based foods decreased tumour development. Some of these studies were published in the “Journal of the National Cancer Institute”, the US Cancer Institute’s official publication.

-Having demonstrated the strong linkage between animal protein intake and cancer development in animals, the next stage of demonstrating this in humans was achieved through the landmark “China Study” – the most comprehensive study on the linkage between diet, lifestyle and diseases ever undertaken in the history of medicine.

Summary on the chapter “Lesson from China” to begin the week after next (as I will be travelling next week)!

Here is to saving more, spending less and eat less animal protein!





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