The cost of diversification over time, and a simple way to improve target-date funds

Haim Levy and Moshe Levy ()

Journal of Banking & Finance, 2021, vol. 122, issue C

Abstract: Diversification across time means changing the asset allocation over time. We show that under mild conditions diversification across time is inferior for all risk-averters and for all investment horizons, relative to a portfolio with the same average asset allocation, held constant over time. Target-date funds help reduce the variation in the asset allocation throughout the lifecycle, by implicitly considering the reduction in human capital with age. However, their structure implies two systematic deviations from constant asset allocation. We suggest a simple correction leading to a typical increase of 5%-22% in welfare.

Keywords: Diversification across time; Diversification throughout time; Lifecycle investing; Target-date fund; Glide-path; Stochastic dominance; Market timing; Return chasing (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:122:y:2021:i:c:s0378426620302570

DOI: 10.1016/j.jbankfin.2020.105995

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