Feb 27, 2020
You can’t get anything good out of life without taking a risk,
and this holds true in the world of investing too. Depending on the
situation, people are willing to either pay more for high-risk or
risk-free, and matters become more complex because the term
'risk-free' means a different thing to everybody. Today’s guest is
economist Allison Schrager, Senior Fellow at the Manhattan
Institute, author of An Economist Walks into a
Brothel, and long time collaborator with Nobel laureate,
Bob Merton. Allison is an expert on risk and she joins us in this
episode to speak about this topic in relation to retirement and
retirement finance. We talk about the idea that while risk has been
given conventionally bad associations, it can be more accurately
understood as a probability distribution between the future
occurrence of both potentially good and potentially bad things.
Allison shares her opinions about how both young and old people
should approach risk, and stresses the importance of having clearly
defined goals and a good financial advisor. She shares her thoughts
on managing systemic vs idiosyncratic risk, why the retirement
crisis is not all doom and gloom, and the laddered bond portfolio
she developed with Bob Merton. Joining this episode, you’ll also
hear Allison speak about how misinformation causes people to be
hesitant about annuities, the connection between risk management in
surfing and investing, and why investing in education is smarter
than investing in a house. Allison covers a whole lot more
risk-related topics in this episode too, so don’t miss out on
Key Points From This Episode:
- Allison’s definition of risk: as a probability distribution.
- The idea that the word risk pertains to both good and bad
- Relativity of the term ‘risk-free’ and its fundamental
connection to price.
- Probability of, and skill in, taking risks depending on how
they are presented.
- The value of having a clear goal in mind as far as managing
- Strategies for managing systematic vs idiosyncratic risk.
- Value adds advisors can give for managing systematic risk.
- Retirement goals in the current crisis and Allison’s work with
Bob Merton. [0:11:51.0]
- The retirement problem as a problem of income, not wealth.
- A duration matching laddered bond portfolio as a risk-free
retirement plan. [0:13:18.0]
- Why 401(k)s are wealth focused compared to defined benefit
- Statistics around retirement age casting the retirement crisis
in less of a bad light.
- Why people are scared of putting their retirements into
- Misinformation that people are given that make them bad at
- Similarities between risk and mitigation in surfing and market
- Idiosyncratic and systemic risks faced upon purchasing a house.
- An argument for investing in education over homeownership.
- Why time diversification is a fallacy in Allison’s opinion.
- Pros and cons of investing in mostly bonds or mostly equities.
- The ultimate riskiness of 60/40 portfolios and other products
- Thoughts on the new trend of adding private equity to
- How the global shortage of safe assets could have an economic
- Advice for pre-retirees: have goals, have a good financial
advisor, and plan.