Growth stocks sound like the perfect match for aggressive, long-term investors—offering high return potential, long horizons, and exciting prospects. But beneath the surface lies a more complex story. Growth and value stocks respond differently to changing economic conditions, and understanding these differences is crucial to building a resilient portfolio.

This post explores why growth stocks are more sensitive to changes in the discount rate, whilst value stocks are more exposed to changes in expected cash flows. We examine the deeper implications of ‘good beta’ and ‘bad beta’—concepts developed by John Y. Campbell and Tuomo Vuolteenaho—and how they influence the real-world risks investors face. Finally, we turn to lifecycle investing: why young investors with risky jobs may benefit from growth, and why older investors might tilt towards value. The result is a more nuanced framework for asset allocation—one that considers not just age or return potential, but how your investments interact with your income, career, and future opportunities.

Most finance textbooks start with the discounted cash flow (DCF) model—project the cash flows, pick a discount rate, and voilà: you’ve got a valuation. It’s neat, tidy, and timeless.

But try applying it to an option and the whole thing falls apart.

Options don’t behave like bonds or businesses. Their value hinges not on steady cash flows but on uncertainty, volatility, and probability. And that’s precisely why the DCF model fails—and why a revolutionary model was needed. Enter the Black-Scholes-Merton model: a groundbreaking approach that reimagined valuation through the lens of hedging, replication, and risk-neutral probabilities.

This post explores why options broke the DCF mould—and how Black, Scholes, and Merton changed finance forever.

The Capital Asset Pricing Model (CAPM) remains a cornerstone of modern finance, showing how risk and return are linked through a single factor: market beta. But real-world investors care about more than just today’s risk—they care about how their investment opportunities change over time. That’s where the Intertemporal Capital Asset Pricing Model (ICAPM) comes in. Introduced by Merton (1973), the ICAPM extends the CAPM’s single-period framework to a dynamic, multi-period world, where investors hedge against changes in income, inflation, volatility, and other economic risks. This post explores how the ICAPM reframes asset pricing, explains anomalies, and offers a more realistic foundation for portfolio construction and long-term investing.

For decades, conventional wisdom has insisted that investors should reduce equity exposure as they age, replacing stocks with bonds to lower risk and secure retirement income. Bonds, after all, are supposed to be the ‘safe’ part of a portfolio—steady, predictable, and protective. But what if that story is not just outdated, but backwards?

A landmark 2025 study by Cederburg, Anarkulova and O’Doherty turns this advice on its head. Using return data from 39 developed countries over more than a century, the authors simulate one million retirement scenarios and reach a striking conclusion: an all-equity portfolio—33% domestic and 67% international stocks—not only delivers higher long-term returns, but also reduces the risk of running out of money in retirement compared to traditional stock-bond mixes. In other words, the asset class long considered the portfolio’s safety net may actually be making retirement less secure.

Yet bonds still have a role to play—not as financial optimisers, but as behavioural anchors. For many retirees, the psychological comfort of owning something stable can be the difference between staying the course and selling out at the worst possible time. The true challenge is not just building a portfolio that performs well on paper, but one that investors can live with when markets test their resolve.