Lifecycle Investing: Why Your Biggest Asset Isn't in Your Portfolio
“Conventional: save gradually, diversify from day one”
- Dollar-cost average into a 60/40 portfolio
- Avoid leverage at all costs
- Time in the market beats timing the market
The Paradox Nobody Talks About
If you've spent any time reading about investing, you've heard the mantra: time in the market beats timing the market. It's one of the few things nearly everyone agrees on. The longer your money is invested, the more it compounds. A dollar invested at 25 is worth far more at retirement than a dollar invested at 45.
And yet, here's the paradox: when you're 25, you have almost no money to invest.
Think about it. Your lifetime earnings might total several million dollars. But in your twenties, your portfolio is probably a rounding error — maybe a few thousand, maybe tens of thousands if you're disciplined. The contributions that would benefit most from compounding are the ones you can't make, because you haven't earned the money yet.
By the time you're 45 or 50 and finally have substantial savings, the compounding runway has shrunk dramatically. The bulk of your market exposure ends up concentrated in the last 15–20 years of your career — precisely when it does the least good.
This isn't a failure of discipline. It's a structural problem with how we accumulate wealth over a lifetime. And in 2010, two Yale economists — Ian Ayres and Barry Nalebuff — published a book called Lifecycle Investing that proposed a provocative solution.
Human Capital — Your Hidden Asset
The key insight of lifecycle investing starts with a question: what is your total portfolio?
Most people answer with whatever's in their brokerage account. Maybe a retirement fund, some index funds, a bit of cash. But Ayres and Nalebuff argue this dramatically understates your actual wealth.
If you're a 25-year-old software engineer (or accountant, or nurse, or any professional with a stable career trajectory), your future earning potential is enormous. Forty years of salary, bonuses, and career growth might sum to several million dollars in present value. This is your human capital — and when you're young, it dwarfs your financial capital.
Here's the critical observation: human capital behaves like a bond. It produces a relatively stable, predictable stream of income over time. It's not risk-free (you could lose your job, become disabled, or see your industry decline), but for most professionals, it's far more bond-like than equity-like.
Now reconsider the classic advice to hold a "60/40 portfolio" — 60% equities, 40% bonds. If your financial portfolio is $20,000 and your human capital is worth $2,000,000, your total portfolio is 99% bonds and 1% equities. That 60/40 allocation in your brokerage account is meaningless in the context of your actual wealth.
To achieve genuine diversification across your lifetime, Ayres and Nalebuff argue, you need significantly more equity exposure when you're young. Your human capital already provides the bond-like stability. What's missing is the equity component.
Leverage as Time Diversification
This is where lifecycle investing gets uncomfortable: if your goal is to spread equity exposure evenly across your lifetime, the math implies that young people should use leverage to invest more than 100% of their current financial assets in equities.
Before you close this tab — this isn't crypto-bro "100x leverage" territory. The suggestion is modest: perhaps 1.5x to 2x leverage on broad market index funds. Think of it as borrowing against your future earnings to invest today, when compounding has the longest runway.
The concept is called time diversification. You're probably familiar with asset diversification — spreading money across stocks, bonds, real estate, and so on to reduce risk. Time diversification is the temporal equivalent: spreading your market exposure across your entire lifetime rather than concentrating it in your peak-earning years.
Here's an analogy. Imagine you could only buy stocks during one decade of your life. Would you choose your 20s (tiny portfolio, maximum compounding time) or your 50s (large portfolio, minimal compounding time)? Obviously, you'd want both — and ideally, roughly equal exposure in each decade. But without leverage, your 20s and 30s are inevitably under-represented.
Historical backtesting by Ayres and Nalebuff showed that a lifecycle strategy — leveraged 2:1 in your 20s, gradually de-leveraging as your financial capital grows — outperformed traditional strategies across virtually every historical period they tested. Not because it avoided losses (it didn't), but because the additional decades of compounding more than compensated for the cost and risk of leverage.
The Inflation Angle
Beyond the academic framework, there's a practical argument that often gets overlooked: inflation erodes cash AND debt.
If inflation runs at 3% annually, every dollar sitting in your bank account loses 3% of its purchasing power each year. But every dollar you owe also becomes 3% cheaper in real terms. A loan at 3% interest with 3% inflation has a real cost of approximately zero. You're borrowing money that depreciates as fast as the interest accrues.
In low-rate environments, this can make leverage remarkably cheap in real terms. But I want to be honest: in many markets right now — including the US and Australia — interest rates are well above 5%. The "cheap debt" angle is genuinely weaker at these levels.
However, the core argument for lifecycle investing doesn't depend on cheap debt. It depends on the observation that your human capital is your largest asset when young, and that conventional portfolios massively under-allocate to equities during the decades when compounding is most powerful. Even if you reject leverage entirely, the framework suggests that a 25-year-old with stable income should probably be at 100% equities rather than 60/40 — because their human capital already provides all the "bond" exposure they need.
The interest rate environment affects the implementation (how much leverage, if any), but not the principle (that lifetime equity exposure should be more evenly distributed).
What I Learned Doing This
I've been practicing a version of lifecycle investing since 2023, so I want to share some hard-won lessons rather than just theory.
Lesson 1: Leverage must be survivable.
My first attempt was with futures — direct market exposure with high leverage and minimal collateral requirements. It lasted until a sudden market drop triggered a margin call and my position was liquidated. I lost money not because the market went down permanently (it recovered within weeks), but because my leverage structure couldn't survive the volatility on the way to the eventual recovery.
This taught me the most important rule of leveraged investing: it doesn't matter if you're right about the destination if you can't survive the journey.
I switched to leveraged ETFs (2x broad market index funds) and maintained a 30% cash buffer alongside my invested position. This gives me effective leverage of roughly 1.4–1.8x — far more modest, but crucially, survivable.
Lesson 2: The cash buffer is offensive, not defensive.
That 30% cash allocation might look like timidity. It's not. It's ammunition.
In early 2025, the market experienced consecutive severe down days. My leveraged positions dropped painfully. But because my leverage was structured to survive drawdowns (ETFs can't be margin-called — the worst case is the ETF itself declining), I was still in the game. More than that, I had cash to deploy at discounted prices.
The ability to buy during a crash — rather than being liquidated during one — is the difference between leverage that destroys wealth and leverage that builds it. Designing your leverage to be anti-fragile means you actually benefit from the volatility that wipes out over-leveraged positions.
Lesson 3: The hardest part is psychological.
The math of lifecycle investing is straightforward. Living it is not. Watching your portfolio drop 30% in a week while knowing you deliberately chose to amplify those losses requires a particular kind of conviction. You have to genuinely believe in the long-term equity premium and in your own ability to hold through pain.
I won't pretend this is easy. It's the hardest part of the strategy, and no amount of backtesting prepares you for it emotionally.
The Honest Caveats
I'd be doing you a disservice if I presented lifecycle investing without its very real requirements and risks.
This strategy demands:
- Stable income. Your human capital must actually be bond-like. If you're a freelancer with volatile income, a startup founder, or in an unstable industry, the foundational assumption weakens significantly.
- A separate emergency fund. Your investment capital and your "keep the lights on" money must be completely segregated. Mixing them is how people get forced out of positions at the worst possible time.
- Psychological tolerance for drawdowns. If seeing a 30%+ portfolio decline would cause you to panic-sell, leverage will destroy your returns rather than enhance them.
- A time horizon of 10+ years. Leverage amplifies short-term volatility. You need enough time for the long-term equity premium to assert itself.
- Understanding that leverage amplifies both directions. A 2x leveraged position that goes up 50% gives you 100%. A 2x leveraged position that goes down 50% gives you negative 100%. The asymmetry of losses is real and must be respected.
If you lose your job during a market crash — exactly when your leveraged portfolio is at its lowest — you may be forced to sell at the worst time to cover living expenses. This is the nightmare scenario, and it's why the "stable income" and "emergency fund" requirements aren't optional.
Finally, the entire framework assumes that equities deliver positive real returns over long periods. If you don't believe in the long-term equity risk premium — if you think the next 40 years of market returns might be zero or negative — then lifecycle investing offers no advantage.
The Takeaway
Lifecycle investing reframes what "risk" means. In the conventional view, risk is volatility — the stomach-churning daily fluctuations of equity prices. In the lifecycle view, the deeper risk is insufficient lifetime equity exposure — arriving at retirement having missed decades of compounding because you didn't have investable capital when it mattered most.
Most people in their twenties and thirties are massively under-exposed to equities relative to their human capital. Their total portfolio — financial assets plus the present value of future earnings — is overwhelmingly bond-like. The 60/40 allocation in their brokerage account is a rounding error on their actual asset allocation.
Whether or not you choose to use leverage, the mental model is valuable: think about your total portfolio across your entire lifetime, not just what's in your brokerage account today. Your future earnings are an asset. Your time horizon is an asset. And the conventional wisdom, for all its merits, systematically ignores both.
This is not financial advice. I'm a software engineer sharing my thinking, not a licensed financial advisor. Lifecycle investing involves significant risks including the possibility of amplified losses. Do your own research and consider consulting a qualified financial professional before making investment decisions.