Rob Arnott Is Wrong; Target Date Funds Should Not Have Glide Paths Ending With 100% In Equities

Friday, September 28, 2012 09:04
Rob Arnott Is Wrong; Target Date Funds Should Not Have Glide Paths Ending With 100% In Equities

Tags: asset allocation | bonds | retirement planning | stocks | target date funds

Should your older clients invest entirely in stocks? Rob Arnott, of fundamental indexing acclaim, recently released a white paper entitled “The Glidepath Illusion” in which he observes that a glidepath with increasing — rather than decreasing — equities results in greater wealth with about the same risk. The press is all over this, even though the conclusion is not a new idea or reasonable. In fact, it’s way off base. 

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Professors Anup Basu and Michael Drew presented a similar view in their 2009 Journal of Portfolio Management article entitled “Portfolio Size Effect in Retirement Accounts: What Does It Imply for Lifecycle Asset Allocation Funds?”

So what is wrong with this picture? Few if any would recommend 100% equity exposure at retirement. In other words, our intuition tells us that retirees can't “afford” that much risk taking, but the Basu-Drew-Arnott simulations tell us otherwise. So I wrote rebuttals that were published in 2009 at Rebuttal and Measuring Risk. Risk is multi-dimensional, and it’s important to measure it correctly for those who rely on us for protection.
The fact is TDFs should end in very safe assets, like short-term TIPS and T-bills, rather than bonds or stocks. The need for stability and predictability is critical as retirement nears because that’s when retirement plans are made, when future lifestyles are dreamt about and finalized. Bonds are NOT safe investments; neither are stocks.
But warnings about target date funds are indeed in order. TDFs are designed for profit rather than the benefit of the participant, so it’s no surprise that equity shops like Alliance Bernstein end at the target date with 80% in equities while bond shops like PIMCO end with 80% in bonds.

Please visit Fiduciary Corner to view (see movies) and read my views. They are anti-establishment, but they are best for beneficiaries. It’s all about the beneficiaries.


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