Excerpt Of Bernstein’s 'Ages Of The Investor'

July 23, 2012

What does the end of a lifetime of successful investing look like, anyway?

The Ages of the Investor. A Critical Look at Life-cycle Investing is intended to be the first installment in the Investing forAdults series. Just as grown-ups do not believe in the Tooth Fairy, the Easter Bunny or Santa Claus, "Investing adults” know that there is no such creature as the Stock-picking Fairy or the Market-timing Fairy. Further, there is no Risk Fairy who will write you cheap options that will protect your stock holdings against loss. Investing adults are familiar with Gene Fama, Zvi Bodie, Jack Bogle, and Burton Malkiel, and understand that a mean variance optimizer does not blend vegetables. In other words, this series is not for beginners. Future topics will, with luck, include the limits of market efficiency and diversification in increasingly non-segmented global markets.


In As You Like It, Shakespeare famously listed the seven ages of man—the crying babe, the reluctant schoolboy, the sighing lover, the honor-seeking soldier, the judge dispensing wisdom, the foolish pantaloon, and, finally, the sad dependent in the throes of that second childhood called senility, “sans teeth, sans eyes, sans taste, sans everything.” Seven investment ages are several too many to easily digest, so I have defined only three much more prosaic ones: beginning, middle, and end, each with its own theory and strategy. This booklet has its origins in several practical and conceptual strands of thinking that have been woven into finance theory over the past few decades. First, I realized that by 2007, many investors had in fact “won the game”—that is, accumulated enough assets to successfully retire—then lost it during financial meltdown of 2007–2009, perhaps forever. The second strand of thinking, most forcefully propounded by such authorities on investing as Zvi Bodie, Robert Arnott, Barton Waring, and Laurence Siegel, stressed the importance of accumulating a portfolio of risk-free assets or the equivalent in an annuitized stream of income that would secure an investor’s retirement years. A third strand of thinking, originating with Paul Samuelson in the late 1960s and later amplified by two of his students, posited that most periodic investment strategies are far too cautious.

The Ages of the Investor endeavors to reconcile these disparate and, at times, contradictory concepts. We’ll find, among other things, that young people should, in general, invest far more aggressively than they do, although it may take them some time to achieve the risk tolerance necessary to do so; that older people, on the other hand, should, in general, aim at an investment strategy heavy on “defeasing assets,” that is, fixed annuities or a laddered bond portfolio that matures throughout their retirement years; and that the trickiest and riskiest part of the process is the transition from the first phase of investing to the second. This booklet’s aim, then, will be to use these concepts to cheat, ever so slightly, the destiny laid out in Shakespeare’s monologue, so that you won’t find yourself, in the end, sans assets.



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