IDEAS home Printed from https://ideas.repec.org/p/ngi/dpaper/10-11.html
   My bibliography  Save this paper

The Portfolio Size Effect and Lifecycle Asset Allocation Funds: A Different Perspective

Author

Listed:
  • Wade D. Pfau

    (National Graduate Institute for Policy Studies)

Abstract

Basu and Drew (in the JPM Spring 2009 issue) argue that lifecycle asset allocation strategies are counterproductive to the retirement savings goals of typical individual investors. Because of the portfolio size effect, most portfolio growth will occur in the years just before retirement when lifecycle funds have already switched to a more conservative asset allocation. In this article, we use the same methodology as Basu and Drew, but we do not share their conclusion that the portfolio size effect soundly overturns the justification for the lifecycle asset allocation strategy. While strategies that maintain a large allocation to stocks do provide many attractive features, we aim to demonstrate that a case for supporting a lifecycle strategy can still be made with modest assumptions for risk aversion and diminishing utility from wealth. Our differing conclusion results from four factors: (1) we compare the interactions between different strategies; (2) we consider a more realistic example for the lifecycle asset allocation strategy; (3) we examine the results for 17 countries; and (4) we provide an expected utility framework to compare different strategies. We find that with a very reasonable degree of risk aversion, investors have reason to prefer the lifecycle strategy in spite of the portfolio size effect.

Suggested Citation

  • Wade D. Pfau, 2010. "The Portfolio Size Effect and Lifecycle Asset Allocation Funds: A Different Perspective," GRIPS Discussion Papers 10-11, National Graduate Institute for Policy Studies.
  • Handle: RePEc:ngi:dpaper:10-11
    as

    Download full text from publisher

    File URL: https://grips.repo.nii.ac.jp/?action=repository_action_common_download&item_id=1032&item_no=1&attribute_id=20&file_no=1
    Download Restriction: no

    References listed on IDEAS

    as
    1. Mauricio Soto & Robert K. Triest & Alex Golub-Sass & Francesca Golub-Sass, 2008. "An Assessment of Life-Cycle Funds," Working Papers, Center for Retirement Research at Boston College wp2008-10, Center for Retirement Research, revised May 2008.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Retirement Planning and Worst-Case Scenarios
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-07-02 19:45:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pfau, Wade Donald, 2011. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle," MPRA Paper 28796, University Library of Munich, Germany.

    More about this item

    Keywords

    lifecycle funds; target date funds; retirement planning; asset allocation; portfolio size effect;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ngi:dpaper:10-11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/gripsjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.