Measuring the Performance of Life-Cycle Asset Allocation
29 Pages Posted: 10 Sep 2009 Last revised: 5 Jan 2010
Date Written: December 29, 2009
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: Suggested Citation