We have just survived the worst debt-fueled binge since the Roaring '20s. TIME's Barbara Kiviat asked economists Ian Ayres and Barry Nalebuff to explain themselves and the strategy they lay out in their new book Lifecycle Investing.

You are advocating that people in their 20s and early 30s take all their retirement savings and buy stocks on margin. Can you explain why that's not as crazy as it sounds? It's not as crazy as it sounds because it helps people better diversify risk across time. It would be really crazy if you only invested in the stock market one year of your life, because that could be a really bad year.

That could be The problem is, having just a few thousand dollars in the market in your 20s doesn't give you very much diversification across time when you have hundreds of thousands or millions of dollars in the stock market in your late 50s and 60s.

Leverage

Another way of saying it is, we believe in stocks for the long run, but most people, when they have lots of stocks, don't have the long run, and when they have the long run, don't have lots of stocks. People seriously underinvest in the market for the first 25 years of their working life. But when you're 22 years old, you just don't have the cash.

You don't have money, so the only way to have more exposure to the market is to employ a little leverage. It may be leverage, but it's not on a lot of money, and it's also not a lot of leverage. Unlike a house, which you might buy on to-1 leverage or to-1 leverage, here we're only talking about 2-to See pictures of the stock-market crash of Do you have numbers to back up that this actually turns out better for people?

Secondly, it would have worked in other countries.

We've looked at stock data from the Nikkei and the FTSE. It's not just good luck.

Two Yale Economists Urge Leverage for Young Investors - TIME

Theory tells us that diversification reduces risk. You know you should buy mutual funds to have lots of different stocks, to not put all your eggs in one basket. Stocks are not perfectly correlated, and so you get lower risk by having a large basket. Well, returns across time are even less correlated than returns across stocks. So if you think of each year as a different asset, you would like to spread your investment out across multiple years.

You expose the same amount of money to stocks, but you reduce risk because you spread that stock exposure more evenly across more years. See pictures of TIME's Wall Street covers. If you're using leverage, how can risk go down? The increased market exposure when young allows you to have less exposure later on. And while the total market exposure is the same, it's better spread out. Therefore, it has less risk. Do people wind up with more money even for time periods like the Great Depression and our more recent financial turmoil?

The cohort that retires just after each crash still winds up with more money than in either of the traditional strategies.

Worriers Welcome. Direxion Inverse and Leveraged ETFs | Direxion

The place where we do the worst most recently is people retiring in the early s. We had them investing less in their final years, so they missed some of the run-up.

If you invest more when you're young and less when you're old, and there's a great run at the end, you won't get the same benefit of that. See pictures of the global financial crisis. MY ACCOUNT SIGN IN SIGN OUT SUBSCRIBE SUBSCRIBE. Politics World Business Tech Health Motto Entertainment Science Newsfeed Living Sports History The TIME Vault Magazine Ideas Parents TIME Labs.

Money LIFE The Daily Cut. Photography Videos TIME Shop. American Voices Rio Olympics Next Generation Leaders The Most Influential People Person of the Year Top of the World A Year In Space. Subscribe Newsletters Feedback Privacy Policy Your California Privacy Rights Terms of Use Ad Choices. Why Young People Should Buy Stocks on Margin By Barbara Kiviat Friday, Apr. Related Financial Toolkit - Gambling Your Retirement The Five Big Questions About Retirement.

Email Print Share Facebook Twitter Tumblr LinkedIn StumbleUpon Reddit Digg Mixx Del.