Episode summary
Patrick Adams: When Stock Crashes Matter for Long-Term Investors | Rational Reminder 403
The Rational Reminder Podcast
· · 1 hr 9 min · Hosts: Benjamin Felix, Cameron Passmore · Guests: Patrick Adams
Summary
Patrick Adams argues that the familiar “stocks for the long run” story breaks down once you account for real-world liquidity needs. Using a large sample of U.S. tax returns from 1998 to 2023, he finds that high-income working-age households’ stock flows are strongly procyclical: they tend to sell during major market crashes and move toward safer fixed income. The mechanism is not just panic selling. Their labor and private-business income also falls when markets fall, so they often need to draw on liquid assets at exactly the wrong time.
He links that behavior to spending commitments such as mortgages, childcare, housing, health care, and insurance, which make it hard to cut consumption quickly. In his life-cycle model, those frictions and labor-income risks imply much lower optimal stock shares for working-age households than standard models do. The model’s headline result is an optimal stock share of liquid wealth around 10% to 40% for the average working-age household, rising with age and liquid wealth. By contrast, retirees can hold higher equity shares because their income is more stable and their withdrawals are smaller relative to wealth.
Key takeaways
- Patrick Adams finds that high-income working-age households’ stock flows are strongly procyclical, with large outflows during market crashes.
- He says labor income risk rises when stocks crash, especially for top earners with bonuses, stock-based pay, or private businesses.
- Patrick Adams argues that housing, childcare, health care, and other fixed expenses act like hidden leverage and force asset sales in bad times.
- His model implies an optimal stock share of liquid wealth of about 10% to 40% for the average working-age household.
- He says retirees can rationally hold higher equity shares because their income is steadier and their withdrawals are smaller relative to wealth.
Notable quotes
“people love research that supports 100% equity. Well, today is not one of those days”
“the findings I I won't I won't spoil them. Um, but they're they're very interesting and they do call into question being 100% equity for your liquid wealth”
“So the model says that the optimal share of liquid wealth invested in stocks is relatively low for the average working age household”
“it's really about emergency funds”
How the episode opens
This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix, chief investment officer, and Cameron Pasmore, chief executive officer at PWL Capital.
Welcome to episode 403. Another super interesting episode. And you know, you said a line at the end of this one, Ben, in our conversation with Patrick Adams that people love research that supports 100% equity.
Well, today is not one of those days, which is kind of the point of the podcast, right? Just to get more information to help people make, as you've said 403 times, better, smarter investment decisions. And this one was particularly interesting from that standpoint because it is a different piece of research which I'll let you describe.
The second interesting piece I took away because Patrick's a PhD candidate at MIT and he talked about the impact of your work on the podcast on him and his cohort that are looking for subjects for their their PhD work. So I thought it was really interesting. So with that, why don't you tell us more about Patrick, his work, and how you discovered him?
Yeah. So he he did say about the podcast that it sounds like a lot of PhD candidates listen uh because it's, you know, it's a medium where you can sit down and listen to a very accomplished researcher in many cases. uh in in this case uh Patrick as he says at the end of the conversation is is a relatively new researcher but we're we you still get to dig into his research but you get to sit down with people who have done research um and hear them talk about it in plain language uh and really tease out the relevant pieces of it for people who are making financial decisions today.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- income risk
- liquidity constraints
- asset allocation
- consumption commitments
- equity risk during downturns
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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The Rational Reminder Podcast, this episode and its artwork belong to Benjamin Felix, Cameron Passmore, and Dan Bortolotti. Octagon is not affiliated with the show; this page is an independent summary.
