Navigating Stock Correlation and Leverage in Investing

Our conversations with Professor Scott Cederburg from Eller College of Management have led to the most heated debates among our listeners! Today, Prof. Cederburg returns to discuss the changes he’s made to his paper that was the foundation of previous conversations - ‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’. We begin with the data setup and headline findings of the paper before Prof. Cederburg defines “domestic” and “international” as they appear in his paper, why the block bootstrap approach is vital to his work, how and why the results of his paper differ from the status quo, and the evaluation metrics he uses to compare different investment strategies. Then, we explore his optimal base portfolio, the strategy he uses to derive it, how it performs in simulated worst-case scenarios, and how it changes when ditching the bootstrap approach or changing strategies from constant spending to proportional spending. To end, we learn of the importance of including the US in international stock portfolios, how it changes when the US is viewed as special above others, the correlation between labor income and domestic stock returns, and how the reviews of academics and practitioners have changed since the first iteration of the paper until this latest edition.  

Key Points From This Episode:

(0:00:00) What to look forward to in today’s conversation with Prof. Scott Cederburg

(0:04:49) The data setup and headline findings from his paper, ‘Beyond the Status Quo.’

(0:07:01) Defining “domestic” and “international” as they appear in Prof. Cederburg’s paper.

(0:08:34) Why the bootstrap approach is necessary for his work. 

(0:12:17) How and why the results of his paper differ from the status quo. 

(0:15:11) Unpacking the evaluation metrics he uses to compare different investment strategies.

(0:16:05) Exploring his optimal base case portfolio and strategy, and how it performs in worst-case simulations.

(0:23:05) How the optimal allocation changes when households vary their portfolio weights.

(0:27:13) What to consider when ditching the block bootstrap in time-varying optimal portfolios. 

(0:29:46) Constant spending versus proportional spending: How the optimal portfolio changes.

(0:30:49) Examining the sequence of returns risk. 

(0:42:14) The importance of including the US market in international stock portfolios. 

(0:43:40) Why the US is treated the same as any other domestic country in the paper, and how the data changes if it’s viewed as special. 

(0:51:40) The extent of the relationship between labor income and domestic stock returns. 

(0:53:01) How leverage affects optimal portfolio results. 

(1:05:20) Assessing how sensitive the paper’s results are to risk aversion. 

(1:06:35) How academics and practitioners have responded to this paper across all iterations.

Links From Today’s Episode:

Meet with PWL Capital — https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://x.com/MarkMcGrathCFP 

Professor Scott Cederburg — https://eller.arizona.edu/people/scott-cederburg 

Professor Scott Cederburg on LinkedIn — https://www.linkedin.com/in/scott-cederburg-0917b0121/ 

Professor Scott Cederburg on Google Scholar — https://scholar.google.com/citations?user=CZKf3WEAAAAJ 

Eller College of Management — https://eller.arizona.edu/  

Episode 224: Prof. Scott Cederburg: Long-Horizon Losses in Stocks, Bonds, and Bills — https://rationalreminder.ca/podcast/224 

Episode 284: Prof. Scott Cederburg: Challenging the Status Quo on Lifecycle Asset Allocation — https://rationalreminder.ca/podcast/284  

Vanguard — https://investor.vanguard.com/  

‘The Portfolio Size Effect and Using a Bond Tent to Navigate the Retirement Danger Zone’ — https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/ 

Papers From Today’s Episode: 

‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406  

‘Is The United States a Lucky Survivor: A Hierarchical Bayesian Approach’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3689958 

‘Risk-Free Interest Rates’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3242836