You can’t get anything good out of life without taking a risk, and this holds true in the world of investing too. Depending on the situation, people are willing to either pay more for high-risk or risk-free, and matters become more complex because the term 'risk-free' means a different thing to everybody. Today’s guest is economist Allison Schrager, Senior Fellow at the Manhattan Institute, author of An Economist Walks into a Brothel, and long time collaborator with Nobel laureate, Bob Merton. Allison is an expert on risk and she joins us in this episode to speak about this topic in relation to retirement and retirement finance. We talk about the idea that while risk has been given conventionally bad associations, it can be more accurately understood as a probability distribution between the future occurrence of both potentially good and potentially bad things. Allison shares her opinions about how both young and old people should approach risk, and stresses the importance of having clearly defined goals and a good financial advisor. She shares her thoughts on managing systemic vs idiosyncratic risk, why the retirement crisis is not all doom and gloom, and the laddered bond portfolio she developed with Bob Merton. Joining this episode, you’ll also hear Allison speak about how misinformation causes people to be hesitant about annuities, the connection between risk management in surfing and investing, and why investing in education is smarter than investing in a house. Allison covers a whole lot more risk-related topics in this episode too, so don’t miss out on it.

Key Points From This Episode:

• Allison’s definition of risk: as a probability distribution. [0:02:54.0]
• The idea that the word risk pertains to both good and bad things. [0:03:57.2]
• Relativity of the term ‘risk-free’ and its fundamental connection to price. [0:04:20.0]
• Probability of, and skill in, taking risks depending on how they are presented. [0:05:11.0]
• The value of having a clear goal in mind as far as managing risk. [0:07:19.0]
• Strategies for managing systematic vs idiosyncratic risk. [0:09:20.0]
• Value adds advisors can give for managing systematic risk. [0:10:01.0]
• Retirement goals in the current crisis and Allison’s work with Bob Merton. [0:11:51.0]
• The retirement problem as a problem of income, not wealth. [0:12:17.0]
• A duration matching laddered bond portfolio as a risk-free retirement plan. [0:13:18.0]
• Why 401(k)s are wealth focused compared to defined benefit plans. [0:14:43.0]
• Statistics around retirement age casting the retirement crisis in less of a bad light. [0:15:19.0]
• Why people are scared of putting their retirements into annuities. [0:17:08.0]
• Misinformation that people are given that make them bad at retirement planning. [0:17:53.0]
• Similarities between risk and mitigation in surfing and market investing. [0:19:39.0]
• Idiosyncratic and systemic risks faced upon purchasing a house. [0:21:26.0]
• An argument for investing in education over homeownership. [0:22:24.0]
• Why time diversification is a fallacy in Allison’s opinion. [0:24:00.0]
• Pros and cons of investing in mostly bonds or mostly equities. [0:24:52.0]
• The ultimate riskiness of 60/40 portfolios and other products too. [0:27:04.0]
• Thoughts on the new trend of adding private equity to portfolios. [0:28:40.0]
• How the global shortage of safe assets could have an economic impact. [0:30:31.0]
• Advice for pre-retirees: have goals, have a good financial advisor, and plan. [0:32:12.0]