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Tactical Target Date Funds

Author

Listed:
  • Francisco Gomes

    (Department of Finance, London Business School, London NW1 4SA, United Kingdom)

  • Alexander Michaelides

    (Department of Finance, Imperial College Business School, London SW7 2AZ, United Kingdom)

  • Yuxin Zhang

    (School of Finance, RenMin University, Beijing 100872, China)

Abstract

We propose target date funds modified to exploit stock return predictability driven by the variance risk premium. The portfolio rule of these tactical target date funds (TTDFs) is extremely simplified relative to the optimal one, making it easy to implement and to communicate to investors. We show that saving for retirement in TTDFs generates economically large welfare gains, even after we introduce turnover restrictions and transaction costs, and after taking into account parameter uncertainty. This predictability also appears to be uncorrelated with individual household risk, suggesting that households are in a prime position to exploit it.

Suggested Citation

  • Francisco Gomes & Alexander Michaelides & Yuxin Zhang, 2022. "Tactical Target Date Funds," Management Science, INFORMS, vol. 68(4), pages 3047-3070, April.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:4:p:3047-3070
    DOI: 10.1287/mnsc.2021.3981
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    More about this item

    Keywords

    target date funds; life cycle portfolio choice; retirement savings; variance risk premium; strategic asset allocation; tactical asset allocation; market timing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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