Chapter 17. The Third Dial: Investment Policy

Nobody can control the returns that are available from the investment markets. But we can control the amount of our assets that we invest in each type of available asset class. This is called asset allocation: For example, one often hears about a "60/40 investor" which is shorthand for someone who allocates 60 percent to various types of equities and 40 percent to various types of fixed-income investments. We discussed in Chapters 4 and 5 the importance of investment policy prior to retirement; in this chapter, we will examine some aspects of investment that take on particular importance after retirement, in the decumulation phase.

Traditional discussion of investment policy deals with financial assets. In decumulation, it is important to broaden the perspective and think in terms not just of financial assets but of all kinds of assets. In particular, think not just of the allocation of financial assets across different asset classes, but of the allocation of wealth across three types of assets: liquid financial assets (such as cash, stocks, and bonds), annuities (particularly those guaranteeing lifetime cash flow), and other assets such as home equity. While some retirees may not have home equity, and many have preannuitized wealth that cannot be converted to a lump sum, it is nevertheless often possible to control the allocation of wealth across these three broad types in decumulation. How they are best deployed is the focus of the ...

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