Measuring the Performance of Life-Cycle Asset Allocation

29 Pages Posted: 10 Sep 2009 Last revised: 5 Jan 2010

See all articles by Thomas Post

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Joan T. Schmit

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance

Date Written: December 29, 2009

Abstract

The United States’ aging population puts pressure on the pension system. Pension reforms consider putting more weight on individually managed retirement savings. Public policy and financial planners, being concerned with households making wise asset allocation decisions, need measures to evaluate individual investment performance. In this contribution, we illustrate two measures for the evaluation of asset allocation performance: a preference-free measure and a preference-based measure. We compare the suitability of both measures along several dimensions. The choice of the measure turns out to be important for the ranking of the performance of asset allocation decisions, and thus great care should be used when deciding on public policy aimed at improving asset allocation behavior. Furthermore, we show that some classical rules of thumb used to mimic optimal life-cycle asset allocation strategies do not necessarily improve investment performance.

Keywords: Asset Allocation, Welfare Costs, Rules of Thumb

JEL Classification: D14, D91, G11, G28

Suggested Citation

Post, Thomas and Schmit, Joan T., Measuring the Performance of Life-Cycle Asset Allocation (December 29, 2009). Available at SSRN: https://ssrn.com/abstract=1458898 or http://dx.doi.org/10.2139/ssrn.1458898

Thomas Post (Contact Author)

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Joan T. Schmit

University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance ( email )

Madison, WI
United States
608-262-4240 (Phone)

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