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https://www.wsj.com/finance/investing/yale-james-choi-portfolio-formula-stocks-02a96afb?st=z9cUhj&reflink=desktopwebshare_permalink
(From the WSJ a few days ago (HT Barry Ritholz))
“Yale University finance professor James Choi recently developed a formula that recommends an asset allocation based in part on your age, income, savings and risk tolerance. The formula is drawn from a paper he co-authored last year and was adapted for The Wall Street Journal.
In many scenarios, the formula recommends a more aggressive, stock-heavy portfolio than other popular guidelines.”
It includes a spreadsheet – and for me (66 and retiring soon) and my wife it recommended a 75% equity portfolio share. The WSJ article (I used one of my free share links above – not sure how that will work here) compares his results to the Vanguard Target and age-minus-100 formulae.
A Morningstar’s article a while ago argued that with bonds projected to pay more you going forward you could significantly decrease your equities allocation I believe to as low as 40% with minimal loss of returns.
https://www.morningstar.com/retirement/whats-safe-retirement-withdrawal-rate-2026
Interesting. I had seen this article but still had to look pretty hard just now to find what led you to that conclusion, as it’s not really stated in the article. For anyone else looking, it’s in the chart labeled Starting Safe Withdrawal Rate %, by Asset Allocation and Time Horizon.
Great timing. I feel this is a case in point of the rule of thumb. If you have a proper plan your asset allocation will naturally flow from that plan, no guessing or heuristics required.
Thanks for sharing. I found it interesting that the formula recommends a lower stock allocation when the 50ish couple has more money to invest. ‘“It’s more conservative when you have more money saved up,” Choi said.’
One could argue that this couple has higher risk tolerance and could thus hold more stock. But I think they’d also want to ask themselves why take more risk just because they can, if they don’t need to take it to meet their goals. In this way I think the formula makes good sense. On the other hand, if they have a big legacy motive, then they have a reason to hold more stock.
@philip durand mentioned he could not use that link, so I put the direct link to the spreadsheet in a reply to him – here it is: https://docs.google.com/document/d/1hykGDl6ZHJmDJmIJ706nErIKg5gWeoTxagnEvpWmuwA/edit?tab=t.0
The spreadsheet explains the formula, including the “risk aversion” factor and the WSJ article has basically a couple of scenarios and resulting outputs so it’s not critical.
In my case, with much of our financial assets in company Fidelity 401Ks with target funds, the implication of this is to push those dates out 10 years or so to get to that suggested equity portfolio share:
Fund Approx Equity Approx Bonds
2025 Fund ~55% ~45%
2030 Fund ~63% ~37%
2035 Fund ~70% ~30%
2040 Fund ~77% ~23%
The link to WSJ article does not work for me unless I buy a subscription.
Ah – sorry about that – can you access the link for the spreadsheet?
https://docs.google.com/document/d/1hykGDl6ZHJmDJmIJ706nErIKg5gWeoTxagnEvpWmuwA/edit?tab=t.0