Investment strategies for the young

Actually, not the very young but, say, those who have just got a job. That is who Ian Ayres and Barry Nalebuff are targeting in their new book, Lifecycle Investing. They want to convince people that it is a good idea to have more of their savings in riskier assets such as stocks and, in fact, they should do this through margin lending. It is a bold claim given what we just went through but Ayres and Nalebuff back their arguments up with clear theory and lots of evidence. Put simply, time is on your side and so restricting your portfolio to your earned wealth makes no sense. Of course, in one sense this doesn’t mean borrowing to buy stock rather paying down home mortgages at a slower rate. Here is Ayres explaining the approach.

Now I won’t go into details although I find their argument fairly convincing. But I do want to point out that the Australian government may have stumbled upon this in a forced way through superannuation. Not only does that increase likely savings of younger people but it also does so in a way that forces them to diversify away from cash and property. It is like the entire country joined the Ayres-Nalebuff plan and I wonder if this isn’t a big driver of why we find ourselves in such a good economic position today. This is certainly something I hope people might study one day.

On another score, if you are thinking of following the Ayres-Nalebuff approach, read this NYT article about some social websites that might help you along the way.

3 thoughts on “Investment strategies for the young”

    It helps in the US that they have sub 5% fixed rates for 30 year home loans.
    Ours are usually well over 7% so the return on investments needs to push well over 10% to be worth it.
    Partly the decision to pay down debt rather than invest is an emotional one.  The real decision is a triangle composed of debt reduction, investment and consumer spending.  Pay down mortgage or buy an iPad (tricky decision.  Buy an iPad or invest in a fund/stock (I think we know everyone is getting the iPad).


  2. True…
    But working for a Credit Union personally I find that it is rare to find a person who is well educated in investing. To be honest its hard to find one that has remotely been exposed to any sort of investment other than a term deposit due to the GFC and negative media.. People see the attractive 6% on a term deposit but are unaware that with the cost of tax as well as inflation the 6% is intern dramatically less… If people were educated throughout school on long term investment strategies and the various benefits Austrlia would be a very wealth country as we have the options available to us..


  3. I am not as optimistic about younger people taking on additional leverage to invest in stocks that you obviously are. There are a number of reasons. Firstly, the risk appetite for a younger person should, in theory, be greater but there is a tendency to not understand the risks that are taken due to not being experienced. Perception about being able to handle a bear market vs. actually having to live through one is very different. Secondly, leverage has a symmetrical effect of increasing the ROCE but also potentially wiping out investors. Thirdly, younger investors by nature have greater problems saving due to having a lower income and are at times immature with handling their money – leverage will increase the risk that investors will not have enough capital to handle margin calls.
    Backtesting investment strategies is one thing but as anyone will tell you it is not ex post strategies that rather ex ante – looking in the past to determine future returns or to decide whether or not investment strategies work is subject to the “black swan” events. Don’t forget that banks and hedge funds have used historical data as an excuse to leverage up only to literally blow up. It is dangerous to advise leverage on unsophisticated investors.


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