Meet with PWL Capital: https://pages.pwlcapital.com/en-ca/contact-us?utm_source=content&utm_medium=youtube&utm_campaign=rationalreminder_yt Avoid Online Scams https://pwlcapital.com/stay-safe-online/ Ben Felix or any PWL employee will never reach out to you on social media platforms or WhatsApp to give financial advice. These are scammers trying to commit fraud. PWL Choi et al. Practical Finance Tool: https://research-tools.pwlcapital.com/research/lifecycle-portfolio-choice James' Spreadsheet & Guide: https://docs.google.com/document/d/1hykGDl6ZHJmDJmIJ706nErIKg5gWeoTxagnEvpWmuwA/edit?tab=t.0 In this episode, we welcome back James Choi, Professor of Finance at the Yale School of Management, to unpack one of the most important—and misunderstood—questions in personal finance: How much of your portfolio should be in stocks? Drawing on his new paper, Practical Finance: An Approximate Solution to Lifecycle Portfolio Choice, James walks us through the classic portfolio choice problem first solved by Robert C. Merton, later extended by Francisco Gomes and co-authors, and now made dramatically more usable through a spreadsheet-based approximation. We explore how risk aversion, wealth, labor income risk, and expected returns shape optimal asset allocation, why simple rules like “100 minus your age” aren’t terrible but still costly, and how James and his co-authors managed to approximate a complex dynamic optimization model with an error of less than 0.1% in lifetime welfare. Timestamps: 0:00:00 Intro 0:05:27 Braden's Announcement 0:06:21 Describing the portfolio choice problem 0:7:24 How Robert Merton set up and solved the portfolio choice problem 0:13:10 How Cocco, Gomes, and Maenhout set up and solved the portfolio choice problem 0:16:44 Why labour income, which is risky, is more bond-like in portfolio choice 0:26:43 How James and his co-authors set up and solved the portfolio choice problem 0:28:10 How they approximated their numerical solutions with a simplified model 0:31:17 How close the approximate solutions were to the precise numerical solutions 0:34:40 How their approximately optimal solution compare to rules of thumb (like 100 minus your age in stocks) 0:38:51 What the optimal portfolio over the lifecycle of a typical household looks like 0:41:23 Whether the paper's results have an effect on how James or his co-authors think about their personal asset allocations 0:45:41 James showcases his spreadsheet 0:53:36 How people should approach forecasting their labour income 0:58:59 How frequently people should be updating their assumptions and portfolios 1:02:08 What would happen to the model’s advice for a typical household over the lifecycle if you relaxed the no-leverage constraint 1:09:35 Whether it is possible to recreate the constant 100% equity result in your model using the inputs from the paper "Beyond the Status Quo" 1:16:35 Given where US market valuations are, whether the historical US experience is a good proxy for the expected future US market experience 1:20:26 What James wants to tackle next 1:25:04 Disclaimer Links From Today’s Episode: Practical Finance: An Approximate Solution to Lifecycle Portfolio Choice — https://www.nber.org/system/files/working_papers/w34166/w34166.pdf Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/ Rational Reminder on YouTube — https://www.youtube.com/channel/ Benjamin Felix — https://pwlcapital.com/our-team/ Benjamin on X — https://x.com/benjaminwfelix Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/ Cameron Passmore — https://pwlcapital.com/our-team/ Cameron on X — https://x.com/CameronPassmore