Breaking the Mold: Bold Research Challenges Conventional Wisdom on Target-Date Funds

As we approach the final Federal Reserve meeting of the year, the stock markets continue to reach new record highs. The question lingers: can the Fed sustain this momentum? The answer hinges on the insights provided by Chair Jerome Powell and the dot plot regarding future rate expectations.

Steering away from the current financial buzz, our featured investment perspective challenges conventional wisdom by asserting that the widely advocated balanced portfolio plan is unfounded, proposing instead that stocks alone can secure retirement wealth.

Emory University Ph.D. finance candidate Aizhan Anarkulova, along with finance professors Scott Cederburg from the University of Arizona and Michael S. O’Doherty from the University of Missouri at Columbia, argue against the traditional concept of life cycle investing. This approach advocates diversification between stocks and bonds, with younger individuals holding a higher proportion of equities.

In their recently published research paper, the scholars challenge the fundamental premise of life cycle investing and its age-based diversification principles. Leveraging a dataset spanning 38 countries and almost 130 years, they conducted one million computer-generated simulations on American households, evaluating four crucial retirement outcomes: wealth at retirement, retirement income, savings, and assets at death.

Their research yields a compelling conclusion: maintaining a balanced portfolio of 50% domestic stocks and 50% international stocks throughout one’s lifetime significantly outperforms age-based strategies involving a mix of stocks and bonds. This strategy proves superior in terms of building wealth, sustaining retirement consumption, preserving capital, and generating bequests.

Furthermore, households adopting a 50/50 split between domestic and international stocks are deemed “less likely to exhaust their savings and more likely to leave a large inheritance.” Specifically, strategies focused solely on domestic stocks would have resulted in an average wealth balance of $1.05 million, surpassing the balanced portfolio’s $760,000.

The research underscores the challenges associated with accepting an all-stock approach, acknowledging potential short-term fluctuations. Despite this, the professors argue that the high cost of a balanced portfolio, in terms of forgoing “enormous economic gains” from a stocks-centric strategy, makes the all-equity approach more appealing.

In light of these findings, the scholars recommend revising adviser and pension regulations to consider all-equity strategies as viable safe-harbor alternatives. They emphasize the importance of financial education promoting a steadfast approach, reporting standards that prioritize long-term performance, and regulations that facilitate savers in maintaining a long-term focus.

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