Portfolio size effect in retirement accounts : what does it imply for lifecycle asset allocation funds?

Basu, Anup K. & Drew, Michael (2009) Portfolio size effect in retirement accounts : what does it imply for lifecycle asset allocation funds? The Journal of Portfolio Management, 35(3), pp. 61-72.

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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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17 citations in Scopus
12 citations in Web of Science®
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ID Code: 32502
Item Type: Journal Article
Refereed: Yes
Additional URLs:
Keywords: Asset allocation, Lifecycle fund, Target date fund, Portfolio size effect
DOI: 10.3905/JPM.2009.35.3.061
ISSN: 0095-4918
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2009 Institutional Investor, Journals
Deposited On: 06 Jun 2010 23:37
Last Modified: 29 Feb 2012 14:13

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