Zvi Bodie on the Flaws in Conventional Investment Advice

Brodie's folly is that he over-simplifies the issue.  When a young invester, age 30 and below, is investing for lifecycle, the near decade of drudge in the 70s would have resulted in rebalancing into CDs which were paying much higher than stocks and by 2008 in their 50s, they SHOULD have been looking for all the spare change they could find in their couches, pennies on the street, even selling junk on ebay to come up with more cash to invest in equities, rather than locking in their losses and floding the bond markets with cash making those returns poor as well.  Similarly any young investor with saavy should have given up Latte's and extra bandwdth for a couple of years to pumpmp more cash into long term saving in equities, because the market couldn't have done worse following that crash or we would have had a Great Depression, Part II - a proverbial zombie apocalypse senario in which both the equity and bond markets as well as cash  would become meaningless and only the commmodties you could carry with you and protect from thieves would matter.  So, collapse of civilization aside, equities are always a good bet, BUT.

As your financial pot continues to grow you protect your investments through asset class diversification. I bristled when my advisor, young like me reported the common knowlege that you had to hold 6 months income in cash for a rainy day.  As a young professional, that was counter to my understanding of what we needed to do to save.  After all, after college I had spent a full decade in advaced training with little income to show for it.  Then finally fully invested in the workforce, I had more cash than I'd gotten by with my entire life, my wife, an artist by profession, and I were raising two, eventually three boys, and we had their college as well as our retirements to save for. Diversification was the only way, because unless we could shelter our income from the FAFSA, which I believe would be a felony, we were facing more than $600K just to put our boys through a college education of the quality we had both received.  That was our plan for the future.  Then 9-11 happended and our oldest then 16 enlisted in the armed forces on his 17th birthday and invested the next decade of his life in two wars, though even he was investing his excess, income tax-free, combat pay in equities.  He's still working on finishing his college, while saving for his own daughter's and an expected second child's college education, and expanding his skills beyond the basic skills an army warrant officer helicopter pilot, as he and thousands of other warfighters face the drawdown and an uncertain future in the military.  Our middle son, an actor, would appear to have cast his lot hoping to reach millionaire acres, by a different route through artistic expression, and while my wife in I are amazed by his acting skills, talent and drive to make it work, talk about RISK!  Finally our third boy, just 18 grew up with an oldest brother 11 years his senior who had graduated boot camp before missing his highschool graduation cerremony, and went to war serving in several depolyments during one of which was nearly killed.  Yet even he, who would like to study American History in college and eventually the Law, understands risk aversion has a level at which one is just sticking their head in the sand and making bad choices after the fact.  Even he has an investment in equities. So teach, your children well, because it is not only their father's, but their on hell, they learn and grow by.

Approaching 60, I have a stake in real estate, alternatives and some tax-free bonds as a "cash equivalent".  I don't need 6 months income in cash and I am still significantly invested in equities, even as we face a $275K 4-years college expenses for your youngest and consider ourselves lucky as we spent much less than that on the other two combined, indluding some post college assistance. However, we considerourselves luckier still that our investment in our kids has them on a strong footing to get through life.  Indeed I anticpate going part time within 1-3 years and full retirement  around the time I become fully vested in my SSI investment, which I hardly consider an entitlement.  And, we have one of those indexed annuities that has a bottom, which increaes with the market, then fixes at a new minimum as an alternative to Mr. Brodie's TIPs.  So, take a suggestion from  my experience and invest widely, equities only when your young and foolish, then broadening your base as your hit mid-stride, but given long-term survival into older age becoming the norm, you will not only need something to do, but equities to help get you through it, and keep you going all the way.  After all, what we leave behind is not only our investment in our families and their children, but an estate which has a lifecycle even longer than our own.  You must choose, but choose wisely, and remember: fortune favors the prepared.  Good luck!