Customer Reviews

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

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1 star:		(3)

 

 

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).

I have been getting flak for endorsing the Ayres and Nalebuff book (see above on Amazon.com), just as the authors are for writing it. People are thinking it certainly sounds reckless for young people to leverage two to one into stocks. For some young people, it certainly is. Those who do this with their personal savings and are contemplating buying a house soon could lose their down payment, and thus be unable to buy. This factor is increasingly important after the subprime crisis since no-down-payment mortgages are hard to find now. But Ayres and Nalebuff are advocating such aggressive stock market investing only for retirement portfolios. Most young people could survive an annihilation of their retirement savings; they still have plenty of time to rebuild it later and it may generally be a good bet to take just such a risk. This is the basic point that Ayres and Nalebuff make, and it is right. I worry that this book in the wrong hands (of people with a gambling impulse or who are really more precarious in their financial situation) the book could encourage irresponsible investing. At the present time, the stock market looks rather pricey, and I am less optimistic about young people leveraging stock market investments right now. But, as a general, long-haul advice book, for savvy people who can judge their situation and not get themselves into a corner, the book is indeed valuable. This is not "Dow 36,000" again, as one reviewer says. This is a book about overcoming standard prejudices about investing, and as such it is an important book.

Robert Shiller

Ok, I've just finished reading it and I'm a bit disappointed.
For me it was too much of trying to convince the reader and too little of trying to enable he reader to make his own decision.

I always felt that they were trying to dumb it down to their idea of some sort of average family investor. Only this is exactly the kind of investor that drives the behavioral finance guys nuts because he burns his money by not having his emotions under control. And therefore is much better off with the sort of fire-and-forget strategy offered by a target fund. There's a reason that the general public is not encouraged to trade options or on margin.

I really do not think this "average family investor" ought to play the role of "early adopter" of a new retirement savings strategy, regardless of how politely it is pushed. And pushed it is and if you go solely by their rhetorical tactics you always wait for the and-here-is-our-product-extra-cheap-just-for-you plug.

That said, sometimes an idea may be good, despite of being pushed like by a door-to-door salesman. I think there is a chance of this being the case here.

So, this is my plan:
I finished the book and am I'm not put off. Since I really don't like going into debt, I prefer the options approach. Therefore, I'll read Options as a Strategic Investment next in order to learn more about them. If I still like them, I'll do some portfolio simulations using Excel. If those convince me, I'll figure out a way of automating most of the decision making in order to keep my emotions from busting me. If I can do that too, I'll go for it.

If you aren't prepared to put in this kind of effort, then I suggest you wait until this strategy is packaged into a retail product.

Some smaller points:
The authors cap leverage at 200%. They give no reason for that particular limit. Yes, they /say/ it's okay, but unlike other points they don't illustrate this one by tabulating or charting the results of using different leverages. To me it feels like they just pulled that number out of a hat.
The authors compare the strategy only to a fixed allocation strategy and the 110-minus-age strategy. I was hoping they'd include the lockbox strategy (100% equity, rampdown to 0% during the last 10 years before maturity) in their comparisons. It is fashionable right now and, at least for me, is the benchmark to beat.

Finally, a quote to remember when reading this book:
"On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital." -- Warren Buffet

This book promotes a new and untried strategy using either options or borrowed money. Proceed with extreme caution.

Lifecycle Investing, by Ayers and Nalebuff, presents the idea that young people should invest their savings in S&P500 LEAPs (long term options) and lever up by a factor of 2:1. The book suggests that since individuals are wealthier at age 65 than when they are young, they should borrow from their older-selves, through financial markets, and invest their capital and the borrowed funds into high risk equity, with 2x leverage, when they are young. Thus, their total life-time wealth would be more evenly exposed to market risk over their lifetime. The authors call this time-diversification. To run this strategy we must give up asset diversification! Is that wise? The authors do not show that time diversification trumps asset diversification. I advise you not to use this strategy. I give several reasons, below, for why you should avoid it.

The authors suggest that young investors should not hold bonds; instead they should invest all their savings in the S&P index and leverage it 2:1 by buying LEAPs. This sacrifices asset class diversification! Moreover, how does it help to lever up by 2:1 on equity when one has a mortgage with 10:1 or 20:1 leverage, a student loan and car loan? The book does not take into account the typical situation of a young investor (who has lot of debt) nor does it take into account that he/she would be scarifying asset diversification to show that additional 2:1 leverage on the S&P500 index would be less risky and produce greater expected terminal wealth. The authors compare their strategy of investing in S&P with 2:1 leverage to a fictitious strategy (which invests in S&P and T-bills) and where the investor does not have any debt. Since their recommended strategy is more risky (it is levered with a loan and all invested in S&P) than the strategy that does not borrow and invests in two asset classes (S&P and T-Bills), of course, it should generate greater expected wealth. The authors never make a case that the tradeoff of greater risk for greater reward is a good one for all sort of investors regardless of their disposition towards risk-taking.

My second gripe with the book is that on pg. 161 the authors say the LEAP option on the S&P index was cheaper than buying the index. This is not true. Owning a share of a fund that is benchmarked to the index earns dividends whereas investing in the LEAP does not. All along the authors discuss LEAP on SPY because it is one-tenth the value of SPX and a LEAP on SPY can be purchased for about $4,000, whereas the LEAP on SPX would cost about $40,000. However, the example on pg. 161 uses the SPX LEAP, which would have cost $40,830 + commission and the buyer would not get dividends. And, you would have had to sell the LEAP before expiry, to unwind the position, and would have incurred the trading cost again. You would have to sell the LEAP before expiry because you would not have enough cash in your account to exercise it and if you forcefully exercise it that violate the law - i.e., you would be forced into a margin position but retirement accounts don't permit margin borrowing. Moreover, how many people have $41K+ in their retirement accounts, when they are young, to buy one SPX LEAP option? In any case, the "ask-price" for the SPX LEAP was $408.30 but the authors used the "bid-price" of $403.50, which makes the LEAP cheap to buy and their strategy look attractive. I doubt this is an unconscious error. For this reason alone, you should avoid their strategy and not place faith in their analysis.

My third complaint is that the authors claim they back-tested the strategy for about 100 years. But LEAPs on S&P500 did not start trading until recently. And, I don't think the authors used the margin borrowing rate (for 2x leverage) to back-test their strategy, which would be substantial. Instead, I think they used the risk-free rate, which is the rate Uncle Sam borrows at. (Specifically, I believe they authors used the equity risk premium, which is the return on equity above the risk free rate) to show how good their strategy is. This is simply disingenuous. And even if they used the broker's rate for the past 100 years, the fact is we cannot borrow on margin in our retirement accounts and so the broker rate is irrelevant for such accounts. A better way to test the strategy would have been to subtract about 4% (for round-trip trading cost, which includes the bid-ask spread and commissions, and lost dividends) from the equity risk premium and then simulating the distribution of terminal wealth, for a portfolio comprising several asset classes. We would then see that their strategy to lever up, when young, is not very rewarding at all. Their historic back-test is incompatible with present reality.

Finally, the book assumes the cost of borrowing on margin is the broker's rate. I believe it is higher than that because people have other uses for the funds in their brokerage account--for example, most people have a mortgage and could pay it down. Thus, the cost of buying equity on margin in ordinary brokerage accounts would be equal to 4% (the mortgage rate) + 3% (broker's margin rate) = 7%.

The idea of time diversification probably works if the wealth invested by an individual is more or less evenly spread out over time (i.e., one borrows while young and invests more than his/her capital in the market) and if the individual has a constant relative risk aversion throughout his/her life. The idea of investing equal amounts each year to exploit time diversification is discussed in a paper by Treynor, which is on the Internet.

I have taught Investment courses at universities and urge you to read about asset class diversification a.k.a. asset allocation. I recommend the book, The Intelligent Portfolio by Chris Jones. The importance of allocating your money across asset classes is the pillar of finance. Some major asset classes are: domestic equity, international equity, real estate, emerging markets, long term government bonds and TIPS (Treasury Inflation Protected Securities). Evidence shows asset allocation has been very rewarding for investors and reduces risk significantly. Exploiting time diversification (by levering up) should not sacrifice asset diversification and levering up only makes sense for the most risky asset classes-it does not make sense to lever your investment in T-Bills or bonds.

I also urge you to use common sense and take into account your opportunity cost to decide whether or not to buy more equity and to leverage it further by borrowing from your broker. I explain the above in more detail, below.

First, consider the 401K or IRA plan. Money in these accounts is locked up for all practical purposes until retirement and you cannot borrow in these accounts so the only way to lever up is to use options (LEAPs). I only see LEAPs on S&P500, which are affordable (where the ask price is not substantially greater than the fair theoretical price). What we need to see is how much additional benefit one can generate for their terminal wealth, at retirement, by using margin loan (or LEAPs) and maintaining asset diversification (with several asset classes) and while owning a house with 10:1 leverage ratio.

Now consider the funds in your brokerage account, which can be used for whatever purpose you wish. The opportunity cost of these funds is high. You could use the money to pay down debts (student loan, car loan, credit card balance, and your HOME MORTGAGE!) If you don't own a home, but aspire for one, you should not double your bet on your savings because you will need the funds very soon for down payment. But if you own a home, ask yourself if you would rather first hedge your home value before investing in the S&P index? Consider purchasing PUT options or taking a short position on the Futures on the housing index (offered by CME--Chicago Mercantile Exchange). It requires committing substantial capital in your brokerage account to hedge your home value.

After you have paid off your high interest loans (car loan, etc.) and hedged your home value consider how much of the remaining money you should use for investing in major asset classes versus how much you should pay down your mortgage. Remember, your opportunity cost for investing in major asset classes is the interest rate you are paying on your mortgage. And, if you are contemplating borrowing money from your broker at, say, 3% and paying commissions then your total opportunity cost of investing in equity with leverage is about 7%. Ask yourself: what do you expect to earn by investing in LEAPs on the S&P index? If you expect to earn a lot with these investments, by using leverage, then you could double your bet, as the authors suggest.

Remember to stay diversified across asset classes and avoid LEAPs on asset classes other than the S&P500 because LEAPs have no market depth and so the options would have very high ask prices, relative to their theoretical fair prices.

Below are my suggestions for how you should use your savings, in order of priority.

1. Save up to the limit that employers will match your contributions in a retirement plan.

2. Save in 401K and IRA plans as much as the government allows. Invest the funds in 6 or more major asset classes. If you are financially very savvy, purchase the longest maturity LEAPs with 20% of your retirement savings; lever up your investment in LEAPs by using exercise prices, which are approximately 50% of the index value. (So, if SPY is trading at 100, purchase LEAPS with exercise price of 50).

3. Pay off credit cards and other high interest loans.

4. Save money to buy a car with cash instead of with a loan because even if the loan is at 0% the price of the car purchased with a loan is much higher than if purchased with cash. And, if you already have a car loan, which is financed at 4% of higher rate, then pay it off.

5. If you wish to own a home, save for the down payment and don't expose it to excessive risk.

6. Hedge 80% of your home value by purchasing PUT options or posting collateral with your broker to take a short position on Futures contract on the housing index.

7. Pay off student loans, if you have any.

8. Ask yourself: should you invest in major asset class ETFs or pay down your mortgage.

9. If you don't own a house and don't wish to own one, ignore items 5 & 6, above; instead invest your money in the major asset classes and use 2x leverage when you are young and then reduce leverage as you grow older.

I am not sure how a person's risk aversion changes over time and with different amounts of wealth they own at any given time. This is an empirical issue and is different for each person. Knowing how the level of risk aversion changes over time is important for deciding the rate at which you should lever down.

Wait till a retail product is offered by a reputable asset management company that optimizes asset and time diversification, jointly. I recommend that you not execute the strategy on your own unless you are financially very skilled. Good luck!

Many people do not save or invest in ways that will leave them able to retire comfortably. The idea of using leverage (margin) to help even out the amount of money you have exposed to the stock market over time is an innovative idea. The authors make a convincing case for why many (but not all) people would benefit from using leverage when young to help build up wealth for retirement. Their proposed strategy does surprisingly well over a very long time period and in both US and foreign markets. It even does pretty good in simulated futures with lower (but not horrible) stock returns. The idea is solid as long as stocks outperform bonds or other asset classes in the future.

When it comes to implementing the strategy in your retirement account, the book is a bit thin. First off, you can't borrow on margin in your retirement accounts so the simulations run throughout the book aren't completely relevant to your IRAs and 401k. You can borrow on margin outside of tax-sheltered accounts. But, because you need to re-balance monthly or quarterly in order to avoid margin calls and keep the proper leverage - taxes could be a huge issue. Using Lifecycle investing outside of your retirement portfolio may be no better than just buying a broad stock index and holding it with all the money in your IRA. There is one leveraged solution for IRAs, you could buy options - except they don't earn dividends. None of the scenarios were run with only price returns for the 2:1 leveraged phase. So, it's hard to evaluate how this would perform over the long-run. Also, options are a much more sophisticated investment method and you should learn about them before jumping in. It's also doubtful a mutual-fund solution could provide the performance of this strategy. I do think it would work as separate managed account product though. The book also provides a surprising performance analysis of the target date funds vs. fixed allocation funds heavy in stock (75% stocks/25% bonds). The fixed allocation funds outperform the target funds handily.

I also have a wish-list for a further book. One thing I'd like to see is a comparison to equally complex retirement strategies that use more diviersity in asset classes (Gold, foreign stocks, corporate or foreign bonds). It's also likely that leveraging bonds or other asset classes where the total returns are larger than the cost of borrowing is a good long-run idea as well. But, we won't know until they do the math or someone else does. That said, the tip on where to go to get super-low margin rates and the thought-provoking proposals in the first 7 chapters of the book are well worth consideration.

I enjoyed 'Lifecycle Investing' and find their approach well reasoned, but I have a hard time finding their ideas being put to good use until it is incorporated into a low cost index fund that requires little thought on behalf of those trying it out.

I am a personal banker, and after having spent a year and a half working with people on their finances, would guess that less than 1% of all people have the financial position and investing acumen to use the ideas in this book as the authors intended. I would guess that that 1% are probably overrepresented in occupations that are sensitive to market risk as well.

I believe in the merits of their ideas, but I see three types of obstacles to their approach right now:

cognitive: how many people really understand LEAP options, buying on margin, etc?
behavioural: how many people can withstand the additional emotional whipsaws that come from investing with leverage over their working life?
practical: how many people have a loose 4k w/o credit card debt or other loans? I also doubt that you could achieve the same asset diversification using this method as you could otherwise.

I think their ideas need at least a few years so they can find their way into a no-load low-cost index fund or ETF that people can passively invest into for this book to have a positive social benefit. Until then, I think their investment advice is likely to have a high error rate among those who try it, for the reasons mentioned above.

I am not an expert in finance. I have done a lot of reading about personal investment strategies. I have also had the opportunity to hear from experts on prudent retirement investments through my previous job (ERISA litigation related). Based on what I know, I think that this book is an important tool for young investors who are worried about retirement and are willing to take steps to secure their future. I do not think that this book is a comprehensive guide to investing in the long term.

The basic strategy of the book -- investing a relatively stable amount of money across time in order to reduce risk -- makes sense. I will note that Robert Schiller, who has a reputation for cautious opinions, has endorsed this book. I will also note that the authors are not exactly slouches. Aside from the credentials of the book's proponents, investing over time does seem to reduce risk, and the argument presented in this book is very persuasive.

I think that this book is most useful when read in conjunction with another book like Malkiel's "A Random Walk Down Wall Street," which extolls the virtues of low cost index fund investing and asset-class diversification. The reason that I would read this book with another like Malkiel's is that the strategy in this book almost sounds too good to be true, and its enthusiasm can be a little contagious. A tempered analysis provides some background and perspective, such that an individual can compare strategies and determine what, if any, role leverage should have in a retirement portfolio.

I have a couple of suggestions for a second edition of the book.

1) The authors should provide a more comprehensive guide to LEAPs, especially since investing on margin is not permitted in tax sheltered retirement accounts. The book is not exactly clear on the strategy here, and it does not discuss the pros and cons of selling the option before expiration to wind down the position versus exercising the option (if you have the cash to do so). It's also not clear to me from the book that the authors intend for most people to sell LEAPs before they expire, but I gather that is the approach.

2) The authors should provide a more detailed description of how one can evaluate the prospective cost of borrowing. While I know that no one can predict what the market is going to return, it would be helpful for the book to walk you through exactly what kind of return you should expect to break even, in light of the cost of borrowing. I think I have this analysis figured out (if the market returns a percentage equal to 1/2 of the implied interest rate of borrowing, I think you break even), but I'm not entirely sure and the book doesn't go into detail on this.

3) The elephant in the book is student loans. A discussion of how student loans (with a slight tax advantage equal to your marginal rate time interest paid capped at $2500) with relatively high interest rates (6.8%-8.25% for most people these days) compare to a tax-sheltered retirement account that benefits from compound rather than simple interest. Further, and this is probably beyond the scope of the book, an analysis of student loan repayment plans that permit moderate income borrowers to avoid interest capitalization nearly indefinitely as compared to a tax advantaged retirement account would also be helpful.

In sum, I recommend this book. This is not the first book you should read about personal investing, and it should probably not be the last. I think that some more information on the areas outlined above would also be helpful.

I have been reading your book with great interest and it does bring a fresh perspective on things. Unfortunately, it doesn't apply to me even though I'm only 30 since I am in the uncommon situation of having earned a large portion of my lifetime earnings in the past few years and my future earnings are more uncertain (I'm an entrepreneur).

One potential mistake I would like to point out is your characterization of index futures. In the book, you state that the implied cost of borrowing is higher than it is for options (which you advocate). From my research on the matter, I have not found this to be the case. The formula for calculating the fair value is

Cash [1+r (x/360)] - Dividends.

With interest rates being as low as they are, they are actually trading in backwardation, where future prices are lower than spot prices (eg S&P index). This implies that the dividend yield on the S&P is higher than the prevailing interest rate. Even if interest rates rise, they are not going to be any higher than the carry-cost on LEAP options.

Please correct me if I'm wrong.

Nalebuff and Ayres take a straightforward, bold approach in presenting their lifecycle investment strategy - leverage when you are young and slowly decrease your share in stocks as you come closer to your total retirement savings. Yes, the authors could have used kid gloves, by moving the disclaimer on "contraindications" (Chapter 6) to the beginning and equivocating every sentence with "only if you are not affected by daily fluctuations in the stock market" or "not heavily in credit card debt", but that would have diluted the message and the usefulness of the book. This is a strategy that requires discipline, willingness to learn new investment tools (margin or LEAPS), and confidence in the long run superiority of stocks, particularly in the early years when you should be most leveraged. The strategy is tested robustly with historical data and in different countries' stock markets. If you do the research, create your own investment profile and adhere to it, even in years like 2008, then you will nearly guarantee long term success at less risk over traditional strategies - which is rare for economists to promise. Even if you don't agree with everything, it is still a worthwhile read for the way it helps you to rethink how you should value retirement savings, by treating future income (depending on the correlation with the stock market), pensions and social security more like bonds.

Traditional "lifecycle" investment funds, which mirror the "Birthday rule" strategy (invest 110 minus your age in stocks), have been heavily criticized - mostly by politicians - for the amount people approaching retirement age are exposed to the stock market. These critiques are emotionally charged and based on the recent past, rather than rationally looking at the entire lifecycle of an investor. If a 60-year-old who loses 20% of their savings because they are invested 60% in stocks (and they panic and sell), is prevented from retiring at age 65, then likely the person did not have sufficient savings to retire comfortably in the first place (unless they had a large amount of social security or pension to fall back upon); investing mostly in bonds and fixed income won't be sufficient in the long run unless you have a large nest egg to begin with. Yet, Ayres and Nalebuff provide a robust alternative which allows you to wind down your stock investment closer to retirement while beating the overall returns of these traditional lifecycle funds.

I disagree with one review which states that you shouldn't read this book if your employer matches your 401K contributions, you are saving for your kid's college, or your salary is correlated with the market. The authors address all of these very situations, mostly in Chapter 6 "Contraindications". For example, if you have $50k saved for your kids' college education then that money should be kept separate from your retirement savings, which should be invested according to the authors' 200/50 strategy (200% leverage winding down to 50% when you retire). First, the authors describe, max out your employer matches as it is a guaranteed 2/1 return, then turn to leveraging. Ayres/Nalebuff's strategy isn't for you though if your emotional well-being is tied to your daily stock performance.

After reading through the authors working paper and incorporating the simulation data from their website into my own situation, I have partially leveraged my retirement savings through conservative, in-the-money LEAPS, in accordance with my own relative risk aversion and asset preferences. My current Samuelson share is only 35% stocks (currently leveraged at 130%) when adjusting for P/E and volatility currently the VIX is at 32.5) but that will increase when the volatility index decreases to more "normal" levels. Thank you Robert Shiller for posting the current P/E 10 online. One item not explicitly addressed is the value of international diversification. Investing in LEAPs in the S&P 500 only exposes you to US equities, while depending on your worldview for the next 50 years, a large portion of your investment portfolio should be invested abroad. Personally, I prefer a sizable investment in emerging markets (China, South America, etc) as I don't believe the 21st century will be as favorable to US or European equities as the 20th. Applying the strategy to Argentina, a promising young country at the start of the 20th century, would not have resulted in success. It remains to be see whether this strategy will pan out in the next 30-40 years like it would have over the past 100, but alternatives - picking one or two stocks, investing in bonds and hoping there's no inflation, or investing only $4,000 in stocks when you are 25 and $400,000 when you are 65, fare significantly worse in the long run.

A note to Professors Nalebuff and Ayres -- I think the strategy needs a less ambiguous name, as "lifecycle fund" is generally used for the traditional funds (like Vanguard's and the TSP's) which mimic the Birthday rule.

This book was obviously written by people who've never had to rely on their own investing skill to make a living. They are incredibly naive.

If you've ever invested on margin (borrowing money from your broker to increase the size of your investment beyond the net value of your account), you know that it cuts both ways. It improves returns on the upside but also makes them much worse on the downside. The problem is, as your account value declines in a downdraft, the amount you borrowed stays the same. If you have $50 and borrow another $50 to invest $100, a 10% decline (from $100 to $90) will decrease your equity 20% (from $50 to $40), but you will still owe 100% of the $50 you borrowed. If the decline continues, the decrease in your equity will *accelerate*. For example, another 10% decline (from $90 to $81), will cause your net value to decline 22.5% (from $40 to $31).

It is about at this point that you will get a call (if you are lucky, sometimes they don't bother to call) from the margin clerk at your broker. This is known as a "margin call". The call is to inform you that you must put up more money or be sold out. Obviously you don't have more money, since you listened to these eggheads and borrowed 100% more than your original money. So the margin clerk will sell you out of your position.

This is otherwise known as "selling low". It goes against the one obvious way to make money in the market: Buy Low, Sell High. Oh, and if you invest on margin you will also be buying high, since the "hope" is that stock values will go up, so you will need to borrow ever more money to maintain 2:1 leverage as per the authors.

So, their theory is basically, borrow money, buy high, and sell low. This is a possible method for building a small fortune, as long as you start with a sufficiently large one.

I have known many successful investors, and many failed investors. I have never met anyone who succeeded by being 100% on margin at all times, as recommended by the authors. However, I have known many people who lost all their money that way. And that is people who actually follow the markets. Do the authors think people who don't know the first thing about the markets will have better luck?

One of the authors says he is 120% invested. Well, good for him. I guess he has to invest like that so that people will see that he "eats his own cooking". What he neglects to mention is that he is a Yale professor so he probably has a substantial pension from the university that will provide his real retirement paychecks. He also probably has significant home equity. And he doesn't even say what this "120%" number is, so you have no way of knowing how important it is, relative to his entire net worth.