Retirement

Balancing on the Life Cycle: Target Date Funds Need Better Diversification

Topics - Retirement

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Balancing on the Life Cycle: Target Date Funds Need Better Diversification

Traditional life-cycle strategies have some serious shortcomings, the authors of this white paper contend. In the paper, they focus on five: home bias, inflation sensitivity, concentrated risk, volatility sensitivity and a lack of highly diversifying alternative strategies.

Some of these shortcomings, like the home bias, are easier to fix, they assert, while others may require getting comfortable with financial tools like leverage. Using over 100 years of data, the authors show that embracing financial innovation and addressing these shortcomings could have meaningfully improved historical performance.

As life-cycle funds become a bigger part of the investment landscape, the authors argue that it’s increasingly important that they utilize more modern investment techniques, many of which have long been part of the institutional investing toolkit.

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Institutional Investor

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.

 

Diversification does not eliminate the risk of experiencing investment loss.

 

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