Lifecycle investing is growing in popularity in the industry, where people in their 20s and 30s are invested into high risk portfolios (equities) and people approaching retirement are transitioned into low risk portfolios (fixed income and annuities).

This makes perfect sense. However, looking at the portfolio compositions of the pension funds "most risky" category in my home country, they are actually quite conservative; very large allocation to developed market equities with a little in fixed income. This actually seems to be a medium risky solution, given the safe haven nature of GBP and USD combined with the small EM allocation plus no dedicated allocation to small cap or the well known factor premiums. They also have a strong home bias which really annoys me (no doubt this is to reduce tracking error with their peers, not to improve customer returns or risk profile!)

I am in my mid 20s and do not plan to retire for 40 years, so I do not feel that this makes sense for my profile. At my age I feel I should invest in a diversified emerging markets small to mid cap portfolio. Max risk and max returns. I haven't run a monte carlo of this (given the risk/reward expectations) but I expect a priori that this will outperform other allocations in the large majority of sample paths over a 40 year horizon. If I really wanted to do this, I could, since my country has self managed pension fund laws.

I have quite a high tolerance for risk and even if my account crashes by 50% in 8 years, I am OK with that. I understand risk and expectations. I also work in an adjacent industry.

Can somebody please critique this? Am I being sensible? Are my assumptions right and do my conclusions follow from my assumptions given by profile (40 year working life, assumptions about EM superior returns, and my risk-neutral preferences)?

Thank you.

6 Answers 6


"Lifecycle investing is growing in popularity in the industry"

  1. this too shall pass
  2. maybe you'll get lucky and retire with the expected returns
  3. but what if you don't?
  4. remember that irrational markets quote?

You've got a great asset in your youth, however you are not diversified (experience & perspective).

...retired investment advisor


That you want a high risk, high reward investment makes perfect sense. What is a potential downside to this is that emerging markets can go down together. Emerging markets generally provide products (China) or services (India) to wealthy countries. If these wealthy countries decide to have high import taxes on goods from outside the country (protectionism), you would have a huge problem. These protectionist policies could last several decades. Other emerging markets generally rely on oil. I would split my investments between these and invest some money in first world countries.


Apples to Oranges

The idea "invest in risky stocks when young" is based off historical analysis of major Western stock markets. Basically, the New York Stock Exchange is positive over any 30 year period in its history, so it seems likely that it will be positive over your working life. But there are downturns (Great Depression, Great Recession, smaller recessions), so you should shift your allocation to be more conservative as you get closer to retirement to preserve your nest egg if something happens.

But that historical analysis may not apply to emerging markets. We can't do a hundred year long analysis of the Chinese stock market, because it didn't exist until 1990. Maybe a 30 year long depression could happen in China. Maybe the Chinese Communist Party could nationalize major industries. Maybe... any number of things.

We don't know. We only have 31 years of data, and none of that data includes recovering from a major economic disaster (War, Recession, etc.)

I think you are comparing Apples to Oranges when you compare a stock market with a long history, from a democratic, capitalist country to one with a short history from an authoritarian, ostensibly communist country.

Risk Management

Obviously, diversifying to multiple countries mitigates these risks. But I'm still more confident that Western stock markets will be "up" over a 30 year period than emerging markets - because we have some data that supports the Western markets hypothesis, and we're extrapolating that data to the other markets blindly.

Looking to optimize the "highest risk, highest reward" option can sometimes blind us to the fact that these are human systems, and the rules that they follow are more like guidelines.

EDIT: To be explicit - Investing EVERYTHING in emerging markets is probably a bad idea. Some fraction like 10%? Sure.


Your observations about being able to tolerate a higher risk profile is good, but limiting that to your managed investment choices of "emerging markets" is problematic. It is a false dilemma as there are plenty of other passive investments.

The answer to your root question about whether emerging markets are better investments in your 20s than the conservative retirement funds is no. They are worse, as passive investments.


I think you are not being sensible for these reasons:

  • It is desirable to invest in more than one asset class and easy to do so in a way that complements your objectives.
  • Committing to one sector is limiting opportunities. For a risk tolerant individual like yourself, many opportunities exist.
  • You are depending on your current level of observation and interpretation of events. You owe it to your future to do more research before committing.


    Is there going to be that much difference? For an example, I looked at results from two of my funds, one an S&P 500 index fund, the other an international/emerging markets fund. Results are for 1, 3, 5, 10 years, and since I opened them (at the same time) in 1996.

    S&P 500 fund:  35.75 20.58 19.02 15.97  9.22
    International: 21.64 20.41 16.66 13.55 11.73 

    Sometimes the S&P does better, sometimes the international, but in the long term they come out fairly close. And they don't move in perfect sync, so if I happened to want to take money out, I could take from whichever is doing better.

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