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  • Portfolio Size Effect in Retirement Accounts: What Does It Imply for Lifecycle Asset Allocation Funds?

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    55971_3.pdf (211.8Kb)
    Author(s)
    Basu, Anup K
    Drew, Michael E
    Griffith University Author(s)
    Drew, Michael E.
    Year published
    2009
    Metadata
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    Abstract
    Lifecycle funds offered by retirement plan providers allocate aggressively to risky asset classes when the employee participants are young, gradually switching to more conservative asset classes as they grow older and approach retirement. This approach focuses on maximizing growth of the accumulation fund in the initial years and preserving its value in the later years. The authors simulate terminal wealth outcomes based on conventional lifecycle asset allocation rules as well as on contrarian strategies that reverse the direction of asset switching. The evidence suggests that the growth in portfolio size over time significantly ...
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    Lifecycle funds offered by retirement plan providers allocate aggressively to risky asset classes when the employee participants are young, gradually switching to more conservative asset classes as they grow older and approach retirement. This approach focuses on maximizing growth of the accumulation fund in the initial years and preserving its value in the later years. The authors simulate terminal wealth outcomes based on conventional lifecycle asset allocation rules as well as on contrarian strategies that reverse the direction of asset switching. The evidence suggests that the growth in portfolio size over time significantly impacts the asset allocation decision. Due to the portfolio size effect that is observed by the authors, the terminal value of accumulation in retirement accounts is influenced more by the asset allocation strategy adopted in later years relative to that adopted in early years. By mechanistically switching to conservative assets in the later years of a plan, lifecycle strategies sacrifice significant growth opportunity and prove counterproductive to the participant's wealth accumulation objective. The authors' conclude that this sacrifice does not seem to be compensated adequately in terms of reducing the risk of potentially adverse outcomes.
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    Journal Title
    The Journal of Portfolio Management: the journal for investment
    Volume
    35
    Issue
    3
    DOI
    https://doi.org/10.3905/JPM.2009.35.3.061
    Copyright Statement
    © 2009 Institutional Investor Journals This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version : http://www.iijournals.com/toc/jpm/current
    Subject
    Banking, finance and investment
    Finance
    Publication URI
    http://hdl.handle.net/10072/25622
    Collection
    • Journal articles

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