David Blanchett: Regret Optimized Portfolios, and Optimal Retirement Income | Rational Reminder 254

There are many different objective functions you can use when building optimal portfolios. The majority of these approaches define risk from the perspective of variability or bad outcomes, but positive returns could be viewed as “risky” for those that don’t experience them, which is another way of saying that people experience regret (or FOMO, for our trendier listeners). Today, we are joined by David Blanchett, a return guest and the Managing Director and Head of Retirement Research for PGIM DC Solutions, the global investment management arm of Prudential Financial. He is also an Adjunct Professor of Wealth Management at The American College of Financial Services and a Research Fellow for the Alliance for Lifetime Income. David returns to the podcast for an articulate discussion about regret in portfolio construction, what drives it, and how financial advisors can cater to it. We then delve into how David is redefining optimal retirement income strategies, looking at retirement tools, retirement planning, compensation models in the industry, risk exposures, and portfolios. We also get a high-level overview of some of the fascinating work that David has done on home-country bias, plus so much more. For highly technical content presented in an accessible and practical way by one of the brightest minds in retirement planning, be sure to tune in today!
Timestamps:
0:00 Intro
4:29 The difference between risk aversion and regret aversion
7:19 What drives regret in investing
15:01 How David decides what his regret benchmark is
20:26 What asset characteristics drive optimal allocations to regret assets
36:34 The downsides of modeling the retirement liability as a single constant inflation-adjusted amount
47:57 How David set up his dynamic spending rule in his recent work on this topic
54:38 How David describes the utility metric that he used to evaluate alternatives in his analysis
1:02:06 How a financial plan optimized for utility would look through the probability of success lens
1:06:35 How a financial advisor channel affects the products that financial advisors recommend to their clients
1:11:58 How important the country that equities derive their revenue from is, as opposed to their country of domicile, in explaining returns
1:15:37 How this finding changes the view of home country bias, as measured by domicile
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David Blanchett on LinkedIn - / david-blanchett-b0b0aa2
'Regret and Optimal Portfolio Allocations' - www.pm-research.com/content/i...
'Redefining the Optimal Retirement Income Strategy' - www.tandfonline.com/doi/full/...
'Does Advisor Channel Influence Passive Fund Choice?' - papers.ssrn.com/sol3/papers.c...
'Foreign Revenue: A New World of Risk Exposures' - www.pm-research.com/content/i...
'Keep Keeping Your Distance: An Updated Look at 401(k) Participant Behaviors During the COVID-19 Crisis' - www.morningstar.com/articles/...
'Save more with less: The impact of employer defaults and match rates on retirement saving' - onlinelibrary.wiley.com/doi/a...
'The Problems with Monte Carlo are in Your Mind' - www.advisorperspectives.com/a...
'Foreign Revenue: A New World of Risk Exposures' - www.pm-research.com/content/i...

[@nikiruntov198]

Amazing episode. So insightful and out of the box, I would've never gotten this information anywhere else, thank you guys!

[@walterp8697]

Thank you. Great guest. Would it be possible to add timestamp so viewers can just skip directly to interview? Thanks! Appreciate.

[@linvestitorescettico]

Please add subs!!!

[@jonathankr]

Love it. Everyone loves lottery tickets. If investing is super boring, then why is greed so exciting?

[@jmc8076]

Except when lotteries are worth $100s of millions or even billions. 😉

[@BitsOfInterest]

So when I buy International I should buy large cap because they make a lot of revenue from the US to hedge my local (US) consumption 😉👍

[@pware9643]

New Retirement software does a pretty good job of allowing one to put in expenses and income in certain years ahead (ie budget for a new car or grandson tuition in year 20xx, or turn on ss or pension in year 20xx)
The price one pays for guaranteed income in an annuity is low rate of return ..IRR. If one could budget and roll over 3-5 year CD's or MYGA's, especially ones that allow a 10% withdrawal rate with no penalty.. gives flexibility and probable better return.
Advisors will never recommend something that doesn't pay them.. like go buy a rental property and keep it for your income stream.

[@Bobventk]

Interesting… but I’ll continue doing what makes sense

[@davieb8216]

39:26, I would be very surprised if financial planners only gave a binary score to one of these forecast. I am in a pretty small firm that codes up our own models and it diffinitely shows how you fail.

[@davieb8216]

Vanguard has a free one online that give more information than this

[@robinspanier7017]

so the takeaway is to have a regret minimization allocation / portfolio?
i feel like this is starting to do drugs.
hard to close the bottle once its open.
the risk of spiraling out of control should be considered as well, when minimizing the regret factor.
fun topic but nothing to follow :D
i feel like the best way to approach this is to run your portfolio on autopilot with a fixed percentage of your income.
if you want to play stupid games, you have to use non-investment money for it.
why should you use investment money for speculation? there is a reason for the label investment, compared to speculation.