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Balancing on the Life Cycle: Target-Date Funds Need Better Diversification

Jusvin Dhillon, Antti Ilmanen and John Liew
The Journal of Portfolio Management Summer 2016, 42 (4) 12-27; DOI: https://doi.org/10.3905/jpm.2016.42.4.012
Jusvin Dhillon
is a research associate at AQR Capital Management in Greenwich, CT.
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  • For correspondence: jusvin.dhillon@aqr.com
Antti Ilmanen
is a principal at AQR Capital Management in Bad Homburg, Germany.
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  • For correspondence: antti.ilmanen@aqr.com
John Liew
is a founding principal of AQR Capital Management in Greenwich, CT.
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  • For correspondence: john.liew@aqr.com
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Abstract

Traditional life–cycle strategies have some serious shortcomings. In this article, the authors focus on five of those weaknesses: home bias, inflation sensitivity, concentrated risk, sensitivity to episodes of equity market turbulence, and a lack of highly diversifying alternative strategies. Some of these shortcomings, such as home bias, are easier to fix than others, which may require getting comfortable with financial tools like leverage. Using over 100 years of data, the authors show that embracing financial innovation and addressing these shortcomings could have meaningfully improved historical performance. As life-cycle funds become a bigger part of the investment landscape, the authors argue that it’s becoming increasingly important to utilize more modern investment techniques—many of which have long been part of the institutional investing arsenal.

TOPICS: Mutual funds/passive investing/indexing, wealth management

  • © 2016 Pageant Media Ltd
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The Journal of Portfolio Management: 42 (4)
The Journal of Portfolio Management
Vol. 42, Issue 4
Summer 2016
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Balancing on the Life Cycle: Target-Date Funds Need Better Diversification
Jusvin Dhillon, Antti Ilmanen, John Liew
The Journal of Portfolio Management May 2016, 42 (4) 12-27; DOI: 10.3905/jpm.2016.42.4.012

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Balancing on the Life Cycle: Target-Date Funds Need Better Diversification
Jusvin Dhillon, Antti Ilmanen, John Liew
The Journal of Portfolio Management May 2016, 42 (4) 12-27; DOI: 10.3905/jpm.2016.42.4.012
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  • Article
    • Abstract
    • DATA DESCRIPTION
    • LIFE-CYCLE STRATEGIES ARE UNDERDIVERSIFIED
    • COMPARING TWO LIFE-CYCLE STRATEGIES
    • PRACTICALITY AND RISKS OF USING LEVERAGE
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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