Portfolio Strategies in Decumulation Phase: Does Lifecycling Fail?

34 Pages Posted: 14 Aug 2014 Last revised: 25 May 2015

See all articles by Osei Wiafe

Osei Wiafe

Griffith University

Anup K. Basu

Queensland University of Technology; Financial Research Network (FIRN)

En-Te (John) Chen

Queensland University of Technology; Financial Research Network (FIRN)

Date Written: May 25, 2015

Abstract

We compare the performance of the commonly nominated default retirement investment option, the lifecycle fund, to alternative investment strategies during retirees' decumulation phase. Under different shortfall risk measures, we find balanced portfolios with constant exposure to equities, equity dominated portfolios as well as 'reverse lifecycle' portfolios that increase exposures to equities over time to consistently outperform the conventional lifecycle portfolio. While an increasing equity glidepath improves the performance of an investment strategy, the starting asset allocations are equally important. Using a utility-of-terminal wealth approach which allows for loss aversion as discussed in prospect theory by Kahneman and Tversky (1979), we find the Growth portfolio to dominate the alternative strategies at low and moderate thresholds. With increasing wealth threshold levels, a strategy with all equity allocations become dominant. The lifecycle portfolio is dominated by the 'reverse lifecycle' portfolio at all threshold levels.

Keywords: Lifecycle, Asset Allocation, Reverse Lifecycle, Prospect theory, Shortfall risk, Glidepath

JEL Classification: G11, G23, P34, P35

Suggested Citation

Wiafe, Osei and Basu, Anup K. and Chen, En-Te, Portfolio Strategies in Decumulation Phase: Does Lifecycling Fail? (May 25, 2015). Available at SSRN: https://ssrn.com/abstract=2480293 or http://dx.doi.org/10.2139/ssrn.2480293

Osei Wiafe (Contact Author)

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Anup K. Basu

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

En-Te Chen

Queensland University of Technology ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia
61-7-3864-2658 (Phone)
61-7-3864-1500 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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