dynamic lifecycle strategies for target date retirement strongfundsstrong.pdf

ISSN 1836-8123 Dynamic Lifecycle Strategies for Target Date Retirement Funds Anup Basu, Alistair Byrnes and Michael E. Drew No. 2009-02 Series Editor: Dr. Alexandr Akimov 1 Copyright © 2009 by author(s). No part of this paper may be reproduced in any form, or stored in a retrieval system, without prior permission of the author(s). Dynamic Lifecycle Strategies for Target Date Retirement Funds Anup Basu Queensland University of Technology Alistair Byrne University of Edinburgh Michael E. Drew∗ Griffith University ABSTRACT Lifecycle funds offered to retirement plan participants gradually reduce their exposure to stocks as they approach the target date of retirement. We show that such deterministic switching rules produce inferior wealth outcomes for the investor compared to strategies that dynamically alter the allocation between growth and conservative assets based on cumulative portfolio performance relative to a set target. The dynamic allocation strategies proposed in this paper exhibit almost stochastic dominance (ASD) over strategies that switch assets unidirectionally without consideration of portfolio performance. ∗ Corresponding author: Michael Drew, Professor of Finance, Griffith Business School, Griffith University, Nathan Campus, Brisbane, Australia, 4111. Tel: +61 7 373 55311; Email: michael.drew@griffith.edu.au 2 Introduction Target date retirement funds have gained favour with retirement plan investors in recent years. Typically, these funds initially have a high allocation to stocks bu