Tactical Target Date Funds

58 Pages Posted: 16 Jul 2018 Last revised: 20 Feb 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

Date Written: February 1, 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, Tactical Target Date Funds (February 1, 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 )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.london.edu/faculty/fgomes

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

No contact information is available for Yuxin Zhang

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