Portfolio Size and Lifecycle Asset Allocation in Pension Funds

Basu, Anup K. & Drew, Michael E. (2007) Portfolio Size and Lifecycle Asset Allocation in Pension Funds. In Lee, Cheng F. & Thi, Cao Hao (Eds.) The 15th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management, July 20 and July 21, 2007, Ho Chi Minh City, Vietnam.


Lifecycle funds offered by retirement plan providers allocate aggressively to risky asset classes when the employee participants are young and gradually switch 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. This paper simulates terminal wealth outcomes under conventional lifecycle asset allocation rules as well as those given by contrarian strategies that reverse the direction of the switching of assets. Our evidence suggests that the general increase in portfolio size as one approaches retirement is significant from an asset allocation perspective. Due to this portfolio size effect, we find the terminal value of accumulation in retirement account to be critically dependent on the asset allocation strategy adopted by the participant in later years (relative to earlier years). By investing conservatively in such crucial phase, lifecycle strategies recommended by financial advisors sacrifice significant growth opportunity and prove counterproductive to the participant’s wealth accumulation objective. This does not seem to be compensated adequately in terms of reducing the risk of potentially adverse outcomes.

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ID Code: 14450
Item Type: Conference Paper
Refereed: Yes
Additional Information: The contents of this conference can be freely accessed online via the conference's web page (see hypertext link).
Additional URLs:
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > BANKING FINANCE AND INVESTMENT (150200) > Banking Finance and Investment not elsewhere classified (150299)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2007 (please consult author)
Deposited On: 20 Aug 2008 00:00
Last Modified: 29 Feb 2012 13:36

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