The role of the equity risk premium in the shortfall risk of target-date funds
DOI:
https://doi.org/10.61190/fsr.v20i4.4710Keywords:
Bootstrap, Retirement, Equity risk premium, Shortfall, Target-date fundAbstract
Target-date mutual funds are unique because the fund manager is expected to maintain the most efficient allocation for the investor in different investment climates. Using a bootstrap simulation with forward-looking equity risk premiums, we illustrate that a 50/50 stock/bond portfolio will run out of money less frequently than a target-date fund if future stock returns replicate past stock returns. When we introduce equity risk premium adjustments, a portfolio with a greater weight in bonds still outperforms a target-date fund. This analysis suggests that these funds may need to reconsider their asset allocation strategies irrespective of market conditions.
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