David Blanchett, PhD, CFA, CFP®, is Managing Director and Head of Retirement Research for PGIM DC Solutions. PGIM is the global investment management business of Prudential Financial, Inc. He is also currently an Adjunct Professor of Wealth Management at The American College of Financial Services and Research Fellow for the Alliance for Lifetime Income. David has published over 100 papers in a variety of industry and academic journals. When David isn’t working, he’s probably out for a jog, playing with his four kids, or rooting for the Kentucky Wildcats.

https://youtu.be/SOz7hPRpmYI

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!

Key Points From This Episode:

Differences between risk aversion and regret aversion. (0:03:57)
The distinctly human element that drives “investment FOMO.” (0:06:34)
Insight into how David models regret in his research. (0:09:06)
The asset pricing implications of approaching portfolio optimization this way. (0:12:11)
Tips for deciding on what the regret benchmark should be. (0:13:19)
How a portfolio optimization routine based on regret affects asset allocation. (0:14:08)
Ways that the effect of optimizing over regret changes depending on risk aversion. (0:16:55)
Other asset characteristics that might drive optimal allocation to regret assets. (0:18:04)
Why moving away from self-direction is the best thing to happen to 401(k) plans. (0:20:53)
How financial advisors should cater to investors interested in speculative assets. (0:24:00)
Unpacking some of the social and story-driven sources of regret. (0:29:03)
Downsides to modelling retirement liability as a static inflation-adjusted amount. (0:32:00)
Why it’s important to understand the composition of retiree spending and saving. (0:33:57)
David’s research into dynamic spending rules for retirement planning. (0:42:06)
Some of the key pitfalls of existing financial planning tools and solutions. (0:44:38)
Ways that safe withdrawal rates change when you incorporate dynamic spending. (0:51:10)
How advisor channel affects passive fund choice and how clients should respond. (0:57:56)
Insight into David’s research on foreign revenue and home-country bias. (1:02:27)

Participate in our Community Discussion about this Episode:

https://community.rationalreminder.ca/t/episode-254-david-blanchett-regret-optimized-portfolios-and-optimal-retirement-income-discussion-thread/23577

Links From Today’s Episode:

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.

Rational Reminder Website — https://rationalreminder.ca/

Shop Merch — https://shop.rationalreminder.ca/

Join the Community — https://community.rationalreminder.ca/

Benjamin on Twitter — https://twitter.com/benjaminwfelix

Cameron on Twitter — https://twitter.com/CameronPassmore

David Blanchett — https://www.davidmblanchett.com/

David Blanchett on Twitter — https://twitter.com/davidmblanchett

David Blanchett on LinkedIn — https://www.linkedin.com/in/david-blanchett-b0b0aa2/

‘Regret and Optimal Portfolio Allocations’ — https://www.pm-research.com/content/iijpormgmt/49/4/143.full.pdf

‘Redefining the Optimal Retirement Income Strategy’ — https://www.tandfonline.com/doi/full/10.1080/0015198X.2022.2129947

‘Does Advisor Channel Influence Passive Fund Choice?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4068853

‘Foreign Revenue: A New World of Risk Exposures’ — https://www.pm-research.com/content/iijpormgmt/47/6/175

‘Keep Keeping Your Distance: An Updated Look at 401(k) Participant Behaviors During the COVID-19 Crisis’ — https://www.morningstar.com/articles/1032011/keep-keeping-your-distance-an-updated-look-at-401k-participant-behaviors-during-the-covid-19-crisis

‘Save more with less: The impact of employer defaults and match rates on retirement saving’ — https://onlinelibrary.wiley.com/doi/abs/10.1002/cfp2.1152

‘The Problems with Monte Carlo are in Your Mind’ — https://www.advisorperspectives.com/articles/2023/04/24/the-problems-with-monte-carlo-are-in-your-mind

‘Foreign Revenue: A New World of Risk Exposures’ — https://www.pm-research.com/content/iijpormgmt/47/6/175

About The Author

Cameron Passmore

Cameron Passmore has been a leading advocate for evidence-based, systemic investing for over 20 years in the Ottawa area. Today, Cameron and his team serve a broad range of affluent clients across Canada.