Towards a Dynamic Asset Allocation Framework for Target Retirement Funds: Getting Rid of the Dogma in Lifecycle Investing

Lifecycle funds offered to retirement plan participants gradually roll down their exposure to stocks while approaching the target date of retirement. This movement away from equities and towards less volatile assets like bonds and cash is done following an asset allocation principle which emphasizes growth of portfolio in the initial years and preservation in the later years. We show that such deterministic switching rule produce inferior wealth outcomes for the investor compared to strategies that dynamically alter allocation between growth and conservative asset classes at different stages based on cumulative portfolio performance relative to a set target. The dynamic allocation strategies exhibit clear second-degree stochastic dominance and almost firstdegree stochastic dominance over strategies which switch assets unidirectionally without cognizance to the portfolio performance.