Balancing on the Life Cycle: Target-Date Funds Need Better Diversification

2016 ◽  
Vol 42 (4) ◽  
pp. 12-27 ◽  
Author(s):  
Jusvin Dhillon ◽  
Antti Ilmanen ◽  
John Liew
Keyword(s):  
Life Cycle ◽  
Target Date ◽  
Target Date Funds

The Duration Puzzle in Life-Cycle Investment*

2020 ◽  
Vol 24 (6) ◽  
pp. 1271-1311
Author(s):  
Servaas van Bilsen ◽  
Ilja A Boelaars ◽  
A. Lans Bovenberg
Keyword(s):  
Human Capital ◽  
Life Cycle ◽  
Portfolio Theory ◽  
Optimal Portfolio ◽  
Inflation Risk ◽  
Target Date ◽  
Target Date Funds ◽  
Portfolio Allocations ◽  
The Impact

Abstract By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifically, we consider the impact of human capital, inflation risk, and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65 years.

scholarly journals Seven Life Priorities in Retirement

2017 ◽  
Author(s):  
Surya Kolluri ◽  
Cynthia Hutchins
Keyword(s):  
Labor Market ◽  
Life Cycle ◽  
Life Cycle Model ◽  
Cycle Model ◽  
Financial Advice ◽  
Financial Advisor ◽  
Fixed Weight ◽  
Target Date ◽  
Target Date Funds ◽  
Financial Portfolios

Using a theoretical life cycle model, this chapter evaluates how much workers benefit from having the option to hire a financial advisor when it is costly for employees to rebalance their own financial portfolios. Results indicate that having access to a financial advisor at the start of one’s career can be quite beneficial. If delegation to an advisor is available only a decade after entering the labor market, the benefit of delegation is cut by half, and it falls further if delegation is available only later in life (at age 60). The chapter also examines whether simpler target date funds (TDF) and fixed weight portfolios benefit consumers, compared to the outcomes with customized financial advice. The authors show that the simpler portfolio products would need to be provided at zero cost, in order to benefit consumers as much as having access to a financial advisor.

scholarly journals Stock Market Mean Reversion and Portfolio Choice over the Life Cycle

2017 ◽  
Vol 52 (3) ◽  
pp. 1183-1209 ◽  
Author(s):  
Alexander Michaelides ◽  
Yuxin Zhang
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Portfolio Choice ◽  
Short Sales ◽  
Income Risk ◽  
Welfare Losses ◽  
Out Of Sample ◽  
Target Date ◽  
Target Date Funds ◽  
Timing Strategies

We solve for optimal consumption and portfolio choice in a life-cycle model with short-sales and borrowing constraints; undiversifiable labor income risk; and a predictable, time-varying, equity premium and show that the investor pursues aggressive market timing strategies. Importantly, in the presence of stock market predictability, the model suggests that the conventional financial advice of reducing stock market exposure as retirement approaches is correct on average, but ignoring changing market information can lead to substantial welfare losses. Therefore, enhanced target-date funds (ETDFs) that condition on expected equity premia increase welfare relative to target-date funds (TDFs). Out-of-sample analysis supports these conclusions.

DYNAMIC ASSET ALLOCATION FOR TARGET DATE FUNDS UNDER THE BENCHMARK APPROACH

2021 ◽  
pp. 1-26
Author(s):  
Jin Sun ◽  
Dan Zhu ◽  
Eckhard Platen
Keyword(s):  
Asset Allocation ◽  
Dynamic Asset Allocation ◽  
Growth Optimal Portfolio ◽  
Risky Assets ◽  
Target Date ◽  
Target Date Funds ◽  
Asset Allocations ◽  
Investment Choices ◽  
Glide Paths

ABSTRACT Target date funds (TDFs) are becoming increasingly popular investment choices among investors with long-term prospects. Examples include members of superannuation funds seeking to save for retirement at a given age. TDFs provide efficient risk exposures to a diversified range of asset classes that dynamically match the risk profile of the investment payoff as the investors age. This is often achieved by making increasingly conservative asset allocations over time as the retirement date approaches. Such dynamically evolving allocation strategies for TDFs are often referred to as glide paths. We propose a systematic approach to the design of optimal TDF glide paths implied by retirement dates and risk preferences and construct the corresponding dynamic asset allocation strategy that delivers the optimal payoffs at minimal costs. The TDF strategies we propose are dynamic portfolios consisting of units of the growth-optimal portfolio (GP) and the risk-free asset. Here, the GP is often approximated by a well-diversified index of multiple risky assets. We backtest the TDF strategies with the historical returns of the S&P500 total return index serving as the GP approximation.

On Optimal Allocations of Target-Date Funds

2021 ◽  
pp. jor.2021.1.094
Author(s):  
Radu Gabudean ◽  
Francisco Gomes ◽  
Alexander Michaelides ◽  
Yuxin Zhang
Keyword(s):  
Target Date ◽  
Optimal Allocations ◽  
Target Date Funds

Target Date Funds: Characteristics and Performance

2015 ◽  
Author(s):  
Edwin J. Elton ◽  
Martin J. Gruber ◽  
Andre de Souza ◽  
Christopher R. Blake
Keyword(s):  
Target Date ◽  
Target Date Funds ◽  
And Performance
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