Mortgage Your Retirement?

An interesting idea from Ian Ayres & Barry Nalebuff [PDF]:

Conventional wisdom offered to retirement savers is to start out at age 25 mostly in stocks, then wind down to a bond-heavy portfolio at age 65. The conventional advice is spelled out on page 104 in a description of age-based retirement funds offered by the big fund families.

This strategy,we think, is too tame.You should be more than 100% in equities when you are young. An exposure of 200% to start would be a better idea. That’s right—if you are young, you should be buying on margin. Pay down the debt as you age and then ease off to a 50-50 stock-and-bond mix at the beginning of your retirement.

Margin buying? For retirement? It sounds terribly risky, but it in fact reduces the risk that you will end up poor.And it leaves you with much better diversification across time.

In real estate the most important rule is location. For investments, it’s diversification. Investors understand the value of diversifying across domestic stocks and many appreciate the advantage of including international stocks in their portfolio. The big missed opportunity is to do a better job diversifying over time, getting an early (and leveraged) start in stocks.We do this with houses, so why not stocks?