If advisors were stunned by a finding from the Putnam Institute that the optimal retirement portfolio's equity allocation should be between 5% and 25%, they weren't alone. In fact, the study's author, W. Van Harlow, who serves as Putnam's director of investment retirement solutions and head of the Putnam Institute, concedes he was quite surprised.

When Harlow began his research, his thinking was that the 60/40 equity-to-fixed income allocation that works well under so many scenarios would turn out to be optimal. From there, he assumed that a retiree could gradually "roll down" her equity exposure.

Instead, he concluded that, depending on various factors ranging from an individual's withdrawal rate and health, the optimal allocation should fall between 5% and 25%, with many of the numbers close to 10%, if the objective was not to outlive one's assets. Obviously, circumstances vary. A 65-year-old individual who smokes five packs a day and is 80 pounds overweight probably can afford both a higher equity allocation and withdrawal rate than the average retiree.

Harlow is hardly a lightweight. From 1993 to 1998, he served as editor-in-chief of the Financial Analysts Journal. Armed with a double major in math and physics from Rice University and a PhD. in financial economics from the University of Texas, Harlow possesses the academic pedigrees to conduct serious research. In 1990, he was a recipient of the Graham and Dodd Award from the Financial Analysts Federation. Before joining Putnam, he was managing director of the Fidelity Research Institute.

More significantly, his research approximates the findings of BARRA founder Andrew Rudd, who has concluded that many Americans-all but the very affluent-should have much less exposure to equities than they do. Dr. Somnath Basu of California Lutheran University has embraced a similar stance in a column he wrote for Financial Advisor magazine.

As a casual observer, I can't help but wonder whether the research methodology these gentleman used to reach their conclusions attached too much weight to the last decade, which witnessed two of the four worst bear markets in the last century. I am perfectly open to challenging the conventional wisdom in the financial advisory business that applies the 60/40 equity-to-fixed income allocation used in the institutional pension world to individuals' retirement portfolios. People aren't pensions nor are they endowments.

But the suggestion that retirees should have only 5% to 25% of their investments in equties if their primary goal is not to outlive their assets appears downright radical. It's obvious that previous thinking about retirement investing attached too little importance to "sequence-of-returns" risk, or retiring at the start of a bear market. 

Sequential return risk is not to be underestimated. I know someone who retired in 2001 and wound up moving to Panama to save money in 2008, though that was largely due to lousy investments in illiquid commercial real estate in Arizona, not equities. Even though the Arizona office buildings are now attracting occupants, they would have done much better in Vanguard Wellington.

Harlow says it is conceivable that he may be overweighting the importance of sequential return risk, a subject rarely discussed before 2008. But he adds that he gets virtually the same result from Monte Carlo simulations with 80-year return results as he does from 30-year results. "This is a fairly robust result," he says.

Maybe so, but I find it dangerous to extrapolate too much from recent or even historical experience and project it into the future, even if there is little else with which to divine the future. Today, people in developed nations are wrestling with issues arising from the social safety net established from the 1930s through the 1960s and questioning whether entitlement programs are sustainable, largely because no one expected longevity to soar the way it did.