May 25, 2023
There are many different objective functions you can use when building optimal portfolios. The majority of these approaches define risk from the perspective of variability or bad outcomes, but positive returns could be viewed as “risky” for those that don’t experience them, which is another way of saying that people experience regret (or FOMO, for our trendier listeners). Today, we are joined by David Blanchett, a return guest and the Managing Director and Head of Retirement Research for PGIM DC Solutions, the global investment management arm of Prudential Financial. He is also an Adjunct Professor of Wealth Management at The American College of Financial Services and a Research Fellow for the Alliance for Lifetime Income. David returns to the podcast for an articulate discussion about regret in portfolio construction, what drives it, and how financial advisors can cater to it. We then delve into how David is redefining optimal retirement income strategies, looking at retirement tools, retirement planning, compensation models in the industry, risk exposures, and portfolios. We also get a high-level overview of some of the fascinating work that David has done on home-country bias, plus so much more. For highly technical content presented in an accessible and practical way by one of the brightest minds in retirement planning, be sure to tune in today!
Key Points From This Episode:
• Differences between risk aversion and regret aversion.
(0:03:57)
• The distinctly human element that drives “investment FOMO.”
(0:06:34)
• Insight into how David models regret in his research.
(0:09:06)
• The asset pricing implications of approaching portfolio
optimization this way. (0:12:11)
• Tips for deciding on what the regret benchmark should be.
(0:13:19)
• How a portfolio optimization routine based on regret affects
asset allocation. (0:14:08)
• Ways that the effect of optimizing over regret changes depending
on risk aversion. (0:16:55) • Other asset characteristics that
might drive optimal allocation to regret assets. (0:18:04)
• Why moving away from self-direction is the best thing to happen
to 401(k) plans. (0:20:53)
• How financial advisors should cater to investors interested in
speculative assets. (0:24:00)
• Unpacking some of the social and story-driven sources of regret.
(0:29:03)
• Downsides to modelling retirement liability as a static
inflation-adjusted amount. (0:32:00)
• Why it’s important to understand the composition of retiree
spending and saving. (0:33:57)
• David’s research into dynamic spending rules for retirement
planning. (0:42:06)
• Some of the key pitfalls of existing financial planning tools and
solutions. (0:44:38)
• Ways that safe withdrawal rates change when you incorporate
dynamic spending. (0:51:10) • How advisor channel affects passive
fund choice and how clients should respond. (0:57:56) • Insight
into David’s research on foreign revenue and home-country bias.
(1:02:27)
Links From Today’s Episode:
David Blanchett — https://www.davidmblanchett.com/
David Blanchett on Twitter —
https://twitter.com/davidmblanchett
David Blanchett on LinkedIn —
https://www.linkedin.com/in/david-blanchett-b0b0aa2/
© 2023 Rational Reminder Podcast 2
RRP 254 Show Notes
PGIM — https://www.pgim.com/
E137: David Blanchett: Researching Retirement —
https://rationalreminder.ca/podcast/137 ‘Regret and Optimal
Portfolio Allocations’ —
https://www.pm-research.com/content/iijpormgmt/
early/2023/02/01/jpm20231464
‘Keep Keeping Your Distance: An Updated Look at 401(k) Participant
Behaviors During the COVID-19 Crisis’ —
https://www.morningstar.com/articles/1032011/keep-keeping-your-
distance-an-updated-look-at-401k-participant-behaviors-during-the-covid-19-crisis
‘Save more with less: The impact of employer defaults and match
rates on retirement saving’ —
https://onlinelibrary.wiley.com/doi/abs/10.1002/cfp2.1152
‘Redefining the Optimal Retirement Income Strategy’ —
https://www.tandfonline.com/doi/full/
10.1080/0015198X.2022.2129947
‘Focusing on Both Sides of the Balance Sheet: The Benefit of
Liability Optimization’ — https:// web.p.ebscohost.com/abstract
‘The Problems with Monte Carlo are in Your Mind’ —
https://www.advisorperspectives.com/
articles/2023/04/24/the-problems-with-monte-carlo-are-in-your-mind
‘Does Advisor Channel Influence Passive Fund Choice?’ — https://
www.financialplanningassociation.org/learning/publications/journal/APR22-does-advisor-
channel-influence-passive-fund-choice-OPEN
‘Foreign Revenue: A New World of Risk Exposures’ —
https://www.pm-research.com/content/ iijpormgmt/47/6/175
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 YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix —
https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on Twitter — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn —
https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore —
https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on Twitter — https://twitter.com/CameronPassmore
Cameron on LinkedIn —
https://www.linkedin.com/in/cameronpassmore/