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Target Wealth: The Evolution of Target Date Funds

16 Pages Posted: 6 Jun 2017  

Peter Forsyth

Cheriton School of Computer Science, University of Waterloo

Kenneth R. Vetzal

University of Waterloo

Graham Westmacott

PWL Capital

Date Written: June 5, 2017

Abstract

Target Date Funds have become very popular with investors saving for retirement. The main feature of these funds is that investors are automatically switched from high risk to low risk assets as retirement approaches. However, our analysis brings into question the rationale behind these funds. Based on a model with parameters fitted to historical returns, and also on model independent bootstrap resampling, we find that constant proportion strategies give virtually the same results for terminal wealth at the retirement date as target date strategies. This suggests that the vast majority of Target Date Funds are serving investors poorly. However, if we allow the asset allocation strategy to adapt to the current level of the total portfolio value, significantly lower risk of terminal wealth can be achieved, at no cost to its expected value.

Keywords: Retirement savings, target date funds, optimal asset allocation

JEL Classification: G32

Suggested Citation

Forsyth, Peter and Vetzal, Kenneth R. and Westmacott, Graham, Target Wealth: The Evolution of Target Date Funds (June 5, 2017). Available at SSRN: https://ssrn.com/abstract=2980952 or http://dx.doi.org/10.2139/ssrn.2980952

Peter Forsyth (Contact Author)

Cheriton School of Computer Science, University of Waterloo ( email )

Waterloo, Ontario
Canada

Kenneth R. Vetzal

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada
519-885-1211 (Phone)
519-888-7562 (Fax)

Graham Westmacott

PWL Capital ( email )

20 Erb Street W.
Suite 506
Waterloo, N2L 1T2
Canada

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