logging in or signing up 3 3discussant Jolene Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINTLite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 28 Category: Entertainment License: All Rights Reserved Like it (0) Dislike it (0) Added: September 28, 2007 This Presentation is Public Favorites: 0 Presentation Description No description available. Comments Posting comment... Premium member Presentation Transcript Reducing Social Security Risk at the PRA Level - Lifecycle Funds and No-Loss Strategies: Reducing Social Security Risk at the PRA Level - Lifecycle Funds and No-Loss Strategies James Poterba, Joshua Rauh, Steven Venti, and David Wise Discussion by John Y. Campbell Pathways to a Secure Retirement Conference 08/10/2006The Main Points: The Main Points Lifecycle strategies reduce risk with age, but this doesn’t help households that are constrained to take less risk than they would prefer Expense ratios are important because they lower returns for a given level of riskLifecycle Portfolio Choice Theory: Lifecycle Portfolio Choice Theory With iid returns, total risk exposure should be independent of age Human capital is a relatively safe asset whose value diminishes later in working life To compensate, younger households should aggressively take financial risk and older households should cut it back Mean reversion in stock returns strengthens this conclusionHow to Take Risk : How to Take Risk Given high historical stock returns and modest risk aversion, households should take plenty of risk Even in middle age they may want more risk than can be achieved by 100% equity investment PRVW argue for a static 100% equity strategy But there are alternatives: Leverage High beta stocks Options How to Take Risk : How to Take Risk Each of these alternatives has its problems: Leverage is expensive for ordinary households except when they hold housing as collateral, and this distorts the asset mix High-beta stocks appear to be overpriced, except possibly in an international context (emerging markets) Equity index options appear to be overpriced Nonetheless they may give households some ability to improve on the PRVW 100% equity strategyOverpricing of High-Beta Stocks: Overpricing of High-Beta StocksOverpricing of Equity Index Options: Overpricing of Equity Index OptionsHow to Enhance Return : How to Enhance Return For given risk, it is important to get the best possible return PRVW rightly emphasize the importance of low expenses Other things matter too: Diversification across asset classes (e.g. international equities, commodities) Earning an illiquidity premium for retirement savings (e.g. private equity, timberland)Harvard Policy Portfolio: Harvard Policy PortfolioHarvard Investment Beliefs (1) Source: HMC Capital Market Assumptions, 2004: Harvard Investment Beliefs (1) Source: HMC Capital Market Assumptions, 2004Harvard Investment Beliefs (2) Source: HMC Capital Market Assumptions, 2004: Harvard Investment Beliefs (2) Source: HMC Capital Market Assumptions, 2004What Is Realistic? : What Is Realistic? Some ideas are feasible within existing structures: Low expenses Diversification Other ideas require institutional innovation: Modest leverage could be accommodated by structuring a margin account Illiquid assets require abandoning the assumption that 401(k) or PRA assets can be marked to market daily This would be an important step to recapturing some of the benefits of more traditional pension plans. You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
3 3discussant Jolene Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINTLite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 28 Category: Entertainment License: All Rights Reserved Like it (0) Dislike it (0) Added: September 28, 2007 This Presentation is Public Favorites: 0 Presentation Description No description available. Comments Posting comment... Premium member Presentation Transcript Reducing Social Security Risk at the PRA Level - Lifecycle Funds and No-Loss Strategies: Reducing Social Security Risk at the PRA Level - Lifecycle Funds and No-Loss Strategies James Poterba, Joshua Rauh, Steven Venti, and David Wise Discussion by John Y. Campbell Pathways to a Secure Retirement Conference 08/10/2006The Main Points: The Main Points Lifecycle strategies reduce risk with age, but this doesn’t help households that are constrained to take less risk than they would prefer Expense ratios are important because they lower returns for a given level of riskLifecycle Portfolio Choice Theory: Lifecycle Portfolio Choice Theory With iid returns, total risk exposure should be independent of age Human capital is a relatively safe asset whose value diminishes later in working life To compensate, younger households should aggressively take financial risk and older households should cut it back Mean reversion in stock returns strengthens this conclusionHow to Take Risk : How to Take Risk Given high historical stock returns and modest risk aversion, households should take plenty of risk Even in middle age they may want more risk than can be achieved by 100% equity investment PRVW argue for a static 100% equity strategy But there are alternatives: Leverage High beta stocks Options How to Take Risk : How to Take Risk Each of these alternatives has its problems: Leverage is expensive for ordinary households except when they hold housing as collateral, and this distorts the asset mix High-beta stocks appear to be overpriced, except possibly in an international context (emerging markets) Equity index options appear to be overpriced Nonetheless they may give households some ability to improve on the PRVW 100% equity strategyOverpricing of High-Beta Stocks: Overpricing of High-Beta StocksOverpricing of Equity Index Options: Overpricing of Equity Index OptionsHow to Enhance Return : How to Enhance Return For given risk, it is important to get the best possible return PRVW rightly emphasize the importance of low expenses Other things matter too: Diversification across asset classes (e.g. international equities, commodities) Earning an illiquidity premium for retirement savings (e.g. private equity, timberland)Harvard Policy Portfolio: Harvard Policy PortfolioHarvard Investment Beliefs (1) Source: HMC Capital Market Assumptions, 2004: Harvard Investment Beliefs (1) Source: HMC Capital Market Assumptions, 2004Harvard Investment Beliefs (2) Source: HMC Capital Market Assumptions, 2004: Harvard Investment Beliefs (2) Source: HMC Capital Market Assumptions, 2004What Is Realistic? : What Is Realistic? Some ideas are feasible within existing structures: Low expenses Diversification Other ideas require institutional innovation: Modest leverage could be accommodated by structuring a margin account Illiquid assets require abandoning the assumption that 401(k) or PRA assets can be marked to market daily This would be an important step to recapturing some of the benefits of more traditional pension plans.