Tactical Target Date Funds

70 Pages Posted: 16 Jul 2018 Last revised: 14 Dec 2020

See all articles by Francisco Gomes

Francisco Gomes

London Business School

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Yuxin Zhang

Renmin University of China; Renmin University of China

Multiple version iconThere are 2 versions of this paper

Date Written: December 11, 2020


We propose target date funds modified to exploit stock return predictability driven by the variance risk premium. The portfolio rule of these tactical target date funds (TTDFs) is extremely simplified relative to the optimal one, making it easy to implement and communicate to investors. We show that saving for retirement in TTDFs generates economically large welfare gains, even after we introduce turnover restrictions and transaction costs, and after taking into account parameter uncertainty. Crucially, we show that this predictability is uncorrelated with individual household risk, confirming that households are in a prime position to exploit it.

Keywords: target date funds, life cycle portfolio choice, retirement savings, variance risk premium, strategic asset allocation, tactical asset allocation, market timing

JEL Classification: G11, G50

Suggested Citation

Gomes, Francisco and Michaelides, Alexander and Zhang, Yuxin and Zhang, Yuxin, Tactical Target Date Funds (December 11, 2020). Available at SSRN: https://ssrn.com/abstract=3203311 or http://dx.doi.org/10.2139/ssrn.3203311

Francisco Gomes (Contact Author)

London Business School ( email )

Finance Department
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/view/francisco-gomes/home

Alexander Michaelides

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

United Kingdom

Yuxin Zhang

Renmin University of China ( email )

57 Zhong Guanchun Road
Haidian District
Beijing, Beijing 100872

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872

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