Tactical Target Date Funds

46 Pages Posted: 3 Jul 2018

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: June 2018

Abstract

We show that saving for retirement in target date funds (TDFs) modified to take advantage of predictability in excess returns driven by the variance risk premium generates economically large welfare gains. We call these funds tactical target date funds (TTDFs). To be easily implementable and communicated to investors, the portfolio rule followed by TTDFs is designed to be extremely simplified relative to the optimal policy rules. Despite this significant mis-specification, substantial welfare gains persist. Importantly, these gains remain economically important even after we introduce restrictions that limit turnover to empirically observed magnitudes for mutual funds, and after we take into account potential increases in transaction costs. Crucially, we show that this predictability is not correlated with individual household risk, confirming that households are in a prime position to exploit this premium.

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

JEL Classification: G11

Suggested Citation

Gomes, Francisco and Michaelides, Alexander and Zhang, Yuxin, Tactical Target Date Funds (June 2018). CEPR Discussion Paper No. DP13019. Available at SSRN: https://ssrn.com/abstract=3206784

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)

London
United Kingdom

No contact information is available for Yuxin Zhang

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