Life-Cycle Funds: International Diversification, Reverse Glide Paths, and Portfolio Risk

Schleef, Harold J.; Eisinger, Robert M.
January 2011
Journal of Financial Planning;Jan2011, Vol. 24 Issue 1, p50
Academic Journal
• Life-cycle funds (LCFs) vary, both in the initial proportion of equity/bond asset allocation and in the pattern of decline of equity investments over time. • We attempt to answer the following questions: How do life-cycle funds perform relative to alternative asset allocation strategies? What impact, if any, does the inclusion of international equity investments have on the likelihood that one successfully reaches a predetermined retirement goal? • Using Monte Carlo simulations, we analyze numerous hypothetical portfolios and conclude the following: « Inclusion of foreign equities in the portfolio allocation improves the likelihood of reaching one's retirement goal. « Simple generic portfolios that maintain a fixed proportion of assets in equities throughout the entire planning period produce higher probabilities of reaching target values than LCFs. « Comparing typical life-cycle fund glide paths (decreasing equity allocations over time) to corresponding reverse glide paths (increasing equity allocations over time) reveals that the reverse glide paths achieve a lesser probability of failure to reach a $1 million target. • Our research underscores the importance of recognizing and explaining the probabilistic nature of various investment strategies, especially those that allege decreasing equities over time as being advantageous in achieving investment goals. The asset allocation strategies of many LCFs may not provide the best portfolio risk protection when measured in terms of probability of reaching a specific portfolio target.


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