Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Abstract​

We challenge two tenets of lifecycle investing: (i) diversify across stocks and bonds and (ii) reduce equity allocations with age. An optimal lifetime allocation of 33% domestic stocks, 67% international stocks, 0% bonds, and 0% bills vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests. Our lifecycle model preserves crucial time-series and cross-sectional dependencies in asset returns and addresses small sample issues in US data. Our investors prefer diversifying with international stocks, not bonds. Target-date fund investors need 61% more pre-retirement savings to match the all-equity strategy’s expected utility over retirement consumption and bequest.

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