Abstract
In our experience, many investment professionals don’t articulate risk well to clients. This research uniquely and graphically reveals the nature of strategic asset allocation investment risk not only for single-period investors, but also for multi-period investors such as those whose savings are held for retirement. Using Monte Carlo simulations, we evaluate and picture the nature of that multi-period consumption risk with spending rules that are subject to a budget constraint and those that aren’t (such as the 4% rule). Risk in a multi-period context means that realized spending may increase with greater SAA risk, but it may instead be worse.
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In this issue
What Investment Risk Means to You, Illustrated: Strategic Asset Allocation, the Budget Constraint, and the Volatility of Spending during Retirement
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- Article
- Abstract
- ASSET-ONLY RISK, UNDER THE TRADITIONAL CAPM
- WHAT SINGLE PERIOD RISK REALLY MEANS, IN A PICTURE
- IS THE SINGLE-PERIOD CAPM THE BEST MODEL?
- FROM SINGLE PERIOD TO MULTI-PERIOD CAPITAL ASSET PRICING MODELS
- WHAT DOES A MULTI-PERIOD CAPM SPENDING PLAN LOOK LIKE?
- A MULTI-PERIOD SPENDING EXAMPLE
- GRAPHICAL VISUALIZATION OF MULTI-PERIOD SPENDING RISK
- SECOND, WHAT IS THE SPENDING RISK WITH A RISKY SAA POLICY?
- “RESHAPING” SPENDING PLANS: THEY DON’T HAVE TO BE LEVEL—MORE EARLIER AND LESS LATER?
- INFORMING THE STRATEGIC ASSET ALLOCATION DECISION
- THE RISK OF NOT HONORING THE BUDGET CONSTRAINT: THE 4% RULE
- SMOOTHING FORCES DIVERGENCE FROM THE BUDGET CONSTRAINT, ADDING RISK
- SENSITIVITY OF RESULTS TO THE SIMULATION MODEL
- CONCLUSION
- ENDNOTES
- REFERENCES
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