Yale Professor's Formula Argues for Higher Stock Holdings

Edgen Stock·Feb 26 2026, 14:35

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Key Takeaways

A new asset allocation formula from Yale finance professor James Choi challenges traditional investment advice by treating an individual's future earnings as a stable, bond-like asset, often leading to recommendations for higher equity exposure.

Challenging Convention: The model departs from rules like the 60/40 portfolio by incorporating future labor income, suggesting a 100% stock allocation for a 25-year-old with $70,000 in annual income.
Age and Wealth Dynamics: The formula recommends a more conservative allocation as investors age or accumulate wealth; a 50-year-old couple's suggested stock holding drops from 88% to 53% when their investable net worth doubles from $400k to $800k.
Focus on Utility: The framework aims to maximize lifetime spending "utility," not just returns, and offers a 0.06% utility loss versus an optimal portfolio, compared to a 2% loss for the "100 minus age" rule.

Future Earnings Justify 100% Stock Allocation for Young Investors

A new formula from Yale finance professor James Choi proposes a significant shift in asset allocation by treating future lifetime earnings as a large, stable bond. This central insight suggests young investors can absorb more market risk because their primary "asset"—decades of future income—is not strongly correlated with stock market returns.

For a 25-year-old earning $70,000 annually with $25,000 to invest, the formula recommends a 100% allocation to stocks. This stands in sharp contrast to the "100 minus age" rule, which would suggest 75% in stocks, and a typical Vanguard 2065 target-date fund's 91% allocation. As Choi notes, "you still have another 30 years of wages coming to you, so you can actually absorb that loss—no problem."

Allocation Drops to 53% as Household Wealth Doubles

The model dynamically adjusts its recommendations based on an investor's age and accumulated wealth. For a hypothetical 50-year-old couple with a combined $160,000 income and $400,000 in investable assets, the formula suggests an 88% stock allocation. This remains more aggressive than the 50% recommended by the "100 minus age" rule.

However, if that same couple's investable net worth doubles to $800,000, the formula's recommended equity exposure drops sharply to 53%. This shift occurs because market risk now affects a much larger proportion of their total lifetime resources. "It’s more conservative when you have more money saved up,” Choi explains, highlighting the model's sensitivity to an investor's financial position rather than just age.

New Model Outperforms "100 Minus Age" Rule by 33-Fold in Utility

The formula's objective is not to maximize raw returns but the "utility" an investor derives from lifetime spending. Research from Choi's paper shows that for a 22-year-old, the formula results in just 0.06% less utility than a theoretically perfect portfolio. By comparison, the traditional "100 minus your age" rule yields 2% less utility—a more than 33-fold inferior outcome.

Despite its sophistication, the model has limitations. It relies on forecasting future income and market returns, which is inherently uncertain. Furthermore, its current iteration does not account for major assets and liabilities like home equity or mortgage debt, factors that are excluded from many common investing guidelines as well.