This book advises twenty-somethings to put not just 100% of their retirement savings in stocks, but 200%. 2:1 leverage. Young workers, they say, should buy twice as much stock as they can afford, either by buying on margin, or, since the law (which the authors would like to change) prohibits buying on margin in a retirement account, by using "deep-in-the-money LEAP call options." Either way, 2008 would have wiped out everything they had saved, but this, the authors say, is to be expected from time to time and is no big deal in their simulated total-lifecycle statistics. Young workers don't have very much saved, so a total wipeout isn't much of a loss in dollars, and they have enough time to start all over and save it all again.
Before you try this, be aware of some red flags.
Red flags #1, #2, #3, #4, #5, and #6 come from Ayres and Nalebuff themselves, who say you should not try their strategy if ANY of these situations apply to you:
* You have credit card debt.
* You have less than $4,000 to invest.
* Your employer matches contributions to a 401k plan.
* You need the money to pay for your kids' college education.
* Your salary is correlated with the market.
* You would worry too much about losing money.
If any of these apply to you, save your time: you don't even need to read the book.
Red flag #7 is the book's title. It's self-contradictory! The dictionary says "audacious" means "fearless, often recklessly daring." Something cannot be both "safe" and "audacious." You'd better darn well decide for yourself which this plan is. Personally, I think it's audacious.
Red flag #8: the strategies they recommend involves the use of either investing on margin, or the use of "deep-in-the-money LEAP call options." These are investments suitable only for sophisticated, experienced investors. Their step-by-step directions note that "You can buy options at pretty much any brokerage account, although you will have to demonstrate some degree of financial sophistication." This is your life savings you're dealing with, this is no time for posturing or wishful thinking. I've been investing in mutual funds for thirty years, but I haven't got a clue about trading options. I don't think very many people really do. The brokerages make you sign off on those "suitability" statements for a reason.
The authors tell the story of a graduate student in economics who tried his own homebrewed version of a leveraged investing plan. He got a margin call in 2008, could have stopped having merely lost everything, but panicked. Trying to recover, he doubled and redoubled, did something unclear involving credit cards, and lost $200,000 MORE than he had, $200,000 of borrowed money. They tell it to illustrate the danger of not following their plan. But it also shows that some kinds of leverage really are playing with fire--and that very bright people can get into very deep trouble making sophisticated investments they _think_ they understand.
The first rule of investing is "Never invest in anything you don't understand." Take it seriously.
Red flag #9: keep in mind that no human being on earth has ever actually completed their retirement savings using this strategy. Professor Ayres himself is 51. He has not done it. He is far from retirement. And he couldn't have started in his twenties, because LEAPS, introduced in 1990, were not available until he was in his thirties. He can't tell us how it worked out for him.
The authors have some impressive backtesting analysis of how this strategy would have performed in the past. The theory is great. But I would point out that Amazon also sells a book on a "progressive cluster roulette" betting system. It, too, has been extensively backtested, on no less than 40,000 random numbers--as many as there are in a century of daily financial numbers--and, according to its author, it always works.
If you are going to read "Lifecycle Investing" I strongly advise reading it together with Nassim Nicholas Taleb's book, "The Black Swan." Stuff happens. He has a lot of stories of how brilliant, sophisticated investors "blew up" because events that ought to have been rare have a bad habit of happening more often than they should. If a brilliant and extensively backtested theory blows up, it is not much comfort to have the theorists tell you that it shouldn't really count because it was a ten-sigma event.
(P,S: Amazon allows reviews to be revised. Professor Nalebuff's review mentions this one and justly criticizes my snarky remarks about the "cult of equities." I've removed those remarks, and changed the review title, which formerly was "A Dow 36,000 for our time"--an inappropriate comparison to a silly book. I've modified the paragraph about a grad student to make it clear that he was NOT following Ayres and Nalebuff's plan).
