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The Glidepath Illusion: An International Perspective

26 Pages Posted: 22 Feb 2013  

Javier Estrada

IESE Business School

Date Written: February 14, 2013

Abstract

Target-date funds have become a core product for investors saving for retirement. These funds periodically reduce their allocation to stocks, and increase their allocation to bonds and cash, thus becoming more conservative as retirement approaches. This lifecycle strategy implies that investors are aggressive with little capital and conservative with much more capital, which may not be optimal in terms of wealth accumulation. This article evaluates three alternative types of strategies, including contrarian strategies that follow a glidepath opposite to that of target-date funds; that is, they become more aggressive as retirement approaches. The results from a comprehensive sample that spans over 19 countries, two regions, and 110 years suggest that, relative to lifecycle strategies, the alternative strategies considered here provide investors with higher expected terminal wealth, higher upside potential, more limited downside potential, and higher uncertainty but limited to how much better, not how much worse, investors are expected to do with these strategies.

Keywords: Target-date funds, lifecycle investing, glidepath

JEL Classification: G11, G15

Suggested Citation

Estrada, Javier, The Glidepath Illusion: An International Perspective (February 14, 2013). Available at SSRN: https://ssrn.com/abstract=2217406 or http://dx.doi.org/10.2139/ssrn.2217406

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
Av. Pearson 21
Barcelona, 08034
Spain
+34 93 253 4200 (Phone)
+34 93 253 4343 (Fax)

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