you say "all retirement expenses" but you're not talking about long term care, which is a risk and greatly increases the retirement expenses.1) Person A is 100% stock with zero emergency fund. But, all retirement expense is funded by pension and social security. So, is person A aggressive in asset allocation? Person A is not taking any risk or impact to his lifestyle even if the portfolio goes to zero.
at that point a 100% stock portfolio might (or might not) be too aggressive (depends upon if your 100% stocks is 25x expenses or 100x epenses in your other exampl you gave.
Now, they're drawing down at the same time they're taking great risk, but in the end if stocks tank, they'll end up on medicaid that much sooner.
I heard a podcast today on rational reminder about icapm. He might be discussing some of the issues you're addressing because icapm is more about matching liabilities and taking risks based on goals, etc, if I understood him correctly. Peter Mladina's words:
When he's talking hedging I think he means bonds, tips, that sort of thing for the horizon/goals which you can't afford to take risk (like funding your long term care needs as I stated above as one example).And so the ICAPM does that in identifying your degree to which you want to hedge your portfolio is going to partly be based on risk preference or risk tolerance. But then as you look at your funded status, the implications of funded status, both deterministically and stochastically through Monte Carlo, that gets back to risk capacity. And you may have to modify what you had picked in terms of hedging your various goals. You might have picked them with the concept of risk tolerance in mind, but now you have to go back and modify them based on risk capacity...
Really the first thing here is to educate the investor on the definition of risk that ultimately matters. The definition of risk that matters is not standard deviation or volatility. It is a goal relative definition of risk. And then you have to walk through what the implications are.
It's just, stepping back, asset-only risk or goal relative risk. Standard deviation or tracking error relative to the goals. Why is tracking error important? It's because tracking error is the definition of risk that manifests their time into dispersion of future funding outcomes, which is the risk that really matters. How certain is it that you are going to successfully fund that goal?
You can give a listen here:
https://rationalreminder.ca/podcast/338
Statistics: Posted by arcticpineapplecorp. — Fri Jan 10, 2025 4:36 pm