When investing for retirement, conventional wisdom says to overweight stocks in the early years and gradually shift into less volatile investments as retirement nears. Different approaches to lifecycle investing are compared in a November 2008 paper, ” Dynamic Lifecycle Strategies for Target Date Retirement Funds,” authored by Anup Basu, Alistair Byrne and Michael Drew. They looked at:
i) predetermined shift into bonds according to calendar dates, as done by lifecycle mutual funds ii) a dynamic shift into bonds that takes into account bear/bull phases in the stock market iii) constant all-stock portfolio iv) constant balanced portfolio (60% stocks, 30% bonds, 10% treasury bills)
The authors found that the dynamic strategy provided more wealth than the predetermined strategy in most cases, and more than the all-stock strategy in a significant number of cases. The balanced strategy provided the least wealth.