Portfolio size effect in retirement accounts

What does it imply for lifecycle asset allocation funds?

Anup K. Basu, Michael E. Drew

Research output: Contribution to journalArticle

31 Citations (Scopus)

Abstract

Lifecycle funds offered by retirement plan providers allo cate 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 sug-gests 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 influ enced more by the asset allocation strategy adopted in later years relative to that adopted in early years. By mechanis tically 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' con clude that this sacrifice does not seem to be compensated adequately in terms of reducing the risk of potentially adverse outcomes.

Original languageEnglish
Pages (from-to)61-72
Number of pages12
JournalJournal of Portfolio Management
Volume35
Issue number3
Publication statusPublished - Mar 2009

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