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Bear with me for a paragraph or two, and I'll tie what I have to say to bonds and fixed-income.

Cosmologists work with three models of the universe: steady-state, collapsing, expanding. But retirement planners typically work with only two models: steady-state and/or diminishing. Why the asymmetry?

A typical part of retirement planning is a quiz to establish one's “risk tolerance”. The input factors are age, life expectancy, assets, desired income, investing experience, etc. On the basis of those factors, a model portfolio is set up and thereafter maintained. That is the “steady-state” model of the financial universe.

The “diminishing” universe model argues that one's ability to manage risk decreases as one ages, and formulas like “100 minus one's age” are used to shift allocations from stocks to bonds on the theory that less time exists for the person to recover from losses.

But in either model, the person is initially thrown into the stock market and asked to take on risks they are typically ill-prepared to do, and easy things like managing cash-equivalents are given short shrift. Pedagogically, that is exactly bass-awkwards. I would argue that the learning has to begin with the easy, low-risk stuff and then, after experience and confidence are acquired, comes the time to explore more demanding vehicles like stocks, etc. In other words, I work with an “expanding” model of the financial universe. As one ages, one's experiences and skills have increased, as also one's ability to accept and manage risk. Older is wiser; older is better able to compete for yield and return. Older means that risk becomes something to be welcomed, not avoided.

If investing were football, then the argument that risks need to be reduced as age increases would make sense. But investing is principally a game of judgment, and good judgment isn't a characteristic of the young or inexperienced. Loki requires –-and properly so-- that concepts be translated into terms an ten-year could understand. Are there investing activities a ten-year old could do well? Absolutely. And having done those things well, does there come a next step in the learning process, and one after that, and after that?

Why are retirees dumbed down? Why are they rotated into less demanding, less challenging, less rewarding instruments exactly at the time they should be coming into the peak of their achievements in terms of skills and abilities?

Why it happens doesn't concern me. But the consequences do.

The figure that I've seen is that the average, retired couple has an income of $22,500. Let's call it $25k the sake of making the math easier. Let's take away their pension and Social Security benefits and give them $500k to manage instead. They could do the easy thing of dumping it into Treasuries and match their former income stream. As inflation eroded their purchasing power, they could draw down principal. Under a wide variety of scenarios, their assets would outlive them even with the most minimal of investing skills and effort. A success story, right?

Let's rerun the scenario. We yank their pension and SS benefits and give them only $250k to work with. Panic City, right? A 5% return on $250k isn't going to cut it. So, let's make them a deal. We'll give them a week's training at Bright Brothers in 'Vegas (a highly reputable trading firm), fund them for the six week's, follow-up “boot camp”, and yank another $50k to cover costs. They now have just $200k. But they now have the sort of training needed to pull down returns of 25% and better. Are they better off than before? Well, now they have to work for their money, but their money is their own, and the sky is the limit for their returns. If they want to kick back and just do the easy, obvious plays, then their former $25k is easy achievable and can be scaled up as inflation rears its persistent, ugly head. If they want to do the work, then bigger returns are possible. But now they are in the driver's seat.

Investing is a business. How big a business, how successful a business you want it to be, is for you to decide. But there is no theoretical reason for not diminishing investing assets as one gains investing efficiency. That's my idea for this morning. My aversion to managing a portfolio that increases in size as I increase in age isn't an ill-founded idea. It is imply one that isn't often explored. As I age, I do not intend to rotate into increasingly less “risky” vehicles AS RISK IS CONVENTIONALLY MEASURED. I do intend to rotate into vehicles that become less risky FOR ME, because I now understand them better than formerly, and because I now have greater ability to manage those risks and capture their higher returns. In short, I do not intend to dumb myself down as I age. I live in an expanding financial universe, and I want to explore it.

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