Asset allocation insights...

We all know that the risk profile of a person changes with time. As a result, the tradeoff in allocation between riskier (equities) and less riskier (high investment grade bonds) assets should also change through time. Riskier assets are basically required so that the portfolio can grow in real terms (faster than inflation) but, over the short term, can prove volatile. Riskless or low risk assets, on the other hand, tend to exhibit far less volatility (much appreciated in down markets) but won't provide you much in terms of growth.

At a younger age, a more "dynamic" risk profile, defined as a portfolio with a larger allocation to "riskier" assets such as equities, is more appropriate mainly because the person in question typically has a job, which provides a steady stream of income into the future. In other words, the human capital in terms of income generation is much larger for a young person. As the person approaches retirement age, however, this steady stream of income is expected to expire as the human capital potential continues to decay steadily. Human capital is similar to a "bullet" type bond in the sense that a steady income is generated until "maturity". If we are to optimize portfolio, we need to adjust it for the human capital potential. Thus, at a young age, the portfolio allocation to equities should be significant, as the income is assured by the human capital. As the person approaches retirement, however, the human capital can no longer assure a steady stream of income and, hence, a larger allocation to fixed income becomes necessary.
It goes without saying that the shift from one risk profile to another should not be abrupt but progressive.

We can take this thought one step further and think of human capital containing an "embedded option" in the form of the individual's ability to change jobs (with potential repercussions on future income streams). Just like the human capital itself, however, the "embedded option" is subject to time decay. As we get older, our ability to change jobs diminishes. This would imply that as we shift to a more conservative risk profile, in addition to a larger allocation to fixed income, we may need to somehow account for the gradual loss of the "embedded option".