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 retirement savings goal. 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 during a market crash (and they panic and sell), is prevented from retiring at age 65, then likely that person would not have had 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 my account is leveraged at 130%) when adjusting for P/E and volatility, as the VIX is at 32.5) but that will increase when the volatility index decreases to more "normal" levels. BTW, Thank you Robert Shiller for posting the current P/E 10 online, which one can easily pull automatically into a spreadsheet. 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 seen 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.
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Top reviews from other countries
Andy
Must read -- even if you don't plan on using leverage
Reviewed in Canada on June 5, 2021
William Gagnon
wouldn't say the quality is very good as the jacket has multiple tears
Reviewed in Canada on August 4, 2015