### Lifecycle Funds Guard Against Upside Volatility?

**March 4, 2013** - Strategic Allocation

Are target‐date (glidepath) funds that periodically decrease (increase) allocation to stocks (bonds and cash) as the investor ages competitive with alternative strategies? In his February 2013 paper entitled “The Glidepath Illusion: An International Perspective”, Javier Estrada evaluates three alternative types of strategies, all based on a working life of 40 years with annual retirement fund contributions of $1,000 (inflation‐adjusted for a cumulative contribution of $40,000 in real terms):

- Lifecycle strategies with initial stock-bond allocations (in percent) of 100‐0, 90‐10, 80‐20, 70‐30 and 60‐40, and respective final allocations of 0-100, 10‐90, 20‐80, 30‐70 and 40‐60. Allocation adjustments are annual on linear glidepaths.
- Mirror image strategies that start with 0-100, 10‐90, 20‐80, 30‐70 and 40‐60 allocations and end with 100‐0, 90‐10, 80‐20, 70‐30 and 60‐40 allocations.
- Five alternative strategies: fully invested in stocks throughout the 40‐year working life (100×40); fully invested in stocks for the first 20 or 30 years, then shifting annually and linearly out of stocks and into bonds for the remaining 20 or 10 years to end with a 50‐50 stock‐bond allocation (100×20 or 100×30); and, a constant stock-bond allocation of 50‐50 or 60‐40 over 40 years, rebalanced annually.

For each of the World, Europe and 19 developed countries, he generates terminal wealth statistics for 71 overlapping 40-year intervals, the first spanning 1900-1939 and the last spanning 1970-2009. Using real total returns for individual countries (in local currencies adjusted by local inflation) and for the World and Europe (in dollars adjusted by U.S. inflation) during 1900 through 2009, *he finds that:* Keep Reading