Conditional Allocations to Real Estate: An Antidote to Sequencing Risk in Defined Contribution Retirement Plans

Abstract

In this article, the authors investigate the potential for real estate as an asset class to be exploited to protect against sequencing risk (or path dependency) in defined contribution retirement funds. Their results suggest that allocating both listed and unlisted real estate assets to retirement portfolios, even if very minor, can enhance the risk–return profile and probability of successfully achieving retirement outcomes. Using a bootstrap simulation approach, the authors test for a range of asset allocations that include real estate. In addition, they examine the sensitivity of real estate performance to changes in monetary policy to optimize portfolio outcomes for fund managers who actively seek exposure to real estate assets. Their findings indicate that the performance of real estate is highly dependent on monetary policy settings that, when used in a dynamic asset allocation process, have the potential to enhance portfolio returns while limiting the impact of downside risk.

TOPICS: Real estate, retirement