Listen to Zvi Bodie When it Comes to Retirement Planning

Zvi Bodie is absolutely one of the most honest and refreshing voices in finance and economics.  Professor Bodie also happens to be an advocate of life-cycle investing.

A recent interview with Bodie is highly recommended and available in U.S. News & World Report.

Highlights from the interview include:

  • Human capital or your earning power is likely the most important asset you have.  Be sure to take its level of risk into consideration when thinking about investing in the stock market.
  • Stocks are absolutely not an effective hedge against inflation--TIPS or treasury inflation-protected securities are.
  • Diversification is nice, but the only thing that can truly protect your nest-egg is investing in safe assets.
  • Stocks are not safe in the long-run or over any time horizon for that matter:
  • "If it were true that stocks are really safe if you hold them for a long time, then shouldn't the investment company that is trying to convince you to invest in stocks for the long term be willing to offer you a guarantee? What if I am willing to commit to holding stocks for 25 years? Will you guarantee me that at the end of 25 years that I will have at least as much as if I had invested in TIPS or some other safe security? I think you will find that the answer is no unless the company wants to go bankrupt. If it is true, then who should be taking that risk: investment companies or individuals who don't know the first thing about it?"
  • Target date funds are misnamed and misleading.
  • Think of a pyramid when allocating retirement dollars--Social Security is the base, followed by TIPS and then by riskier assets once the safe foundation is in place.

Source: U.S. News & World Report


I know Bodie is a huge fan of treasury inflation protected securities and that he strongly recommended them in his book Worry Free Investing. How did the TIPS recommendation hold-up in the deflationary environment that followed 9/11?

Great question.

The short answer is that the principal is adjusted downward but you are guaranteed return of the original principal at maturity.

I will start a forum thread under investing.