The False Promise Of Target-Date Funds

February 14, 2014

In spite of the relative consistency of target-date wealth distributions across matched glide paths, choosing any particular glide path can have a large impact on retirement wealth under a particular history of returns. Figure 2 shows the wealth outcomes of 20 individual simulated histories, for the same glide paths of Figure 1. Clearly there is a wide range of outcomes, and the best-performing glide path is nearly impossible to discern from this picture. We note that while the static 40/60 portfolio is not usually the highest return under any particular scenario, it is never the lowest. A particular glide path provides no guarantee of strong investment performance relative to other glide paths, and the more extreme glide paths are more exposed to extreme outcomes near the peak of their equity exposure.

Excerpt From July 2013 Persistence Scorecard

Another notable case is where only one contribution is invested over the entire period. Here, the sequence of returns is of no consequence, and every return has equal impact on wealth at the final date. The static investment is optimal from a theoretical perspective, and the simulation results in Figure 3 agree with the theoretical results. Glide paths can only be preferable to static portfolios based on patterns of investments or patterns of returns.


Excerpt From July 2013 Persistence Scorecard



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