Softpanorama

May the source be with you, but remember the KISS principle ;-)
Contents Bulletin Scripting in shell and Perl Network troubleshooting History Humor

Lifecycle strategies

  1. Introduction
  2. Popular 401K investors delusions
  3. Fashionable mutual funds mix
  4. Follow the leader
  5. Naive siegelism
  6. "Financial alchemist" strategy
  7. "All money in bonds" or "Depression might start tomorrow" strategy.
  8. Stable value only or "Depression might start tomorrow" strategy.
  9. Bonds-based strategy
  10. "Gold always shines bright"  and "Commodities rulez" strategies
  11. Lifecycle strategies
  12. Economic cycle based market timing
  13. Combination of lifetime strategies with market timing.
  14. Conclusions
  15. Webliography
  16. Old News

 

Lifecycle strategies are used in mutual funds offered by all major players. They are often called target-date mutual funds:

Shiller’s second innovation is target-date mutual funds: I’m almost surprised that he didn’t suggest some kind of principal-protection scheme, involving derivatives, instead. (Maybe because that would have sounded too much like portfolio insurance, which caused the 1987 crash.) But target-date funds are widely misunderstood, and in 2008 some 2010 funds contrived to underperform the S&P 500. They’re a mess, and they’re expensive, and it’s not obvious that they do any good. So color me unconvinced on this front.

Target date funds use your rerierement date (implisidly your age) ass a parameter and change allocation to more conservative as your age. The main problem is that they are overly aggressive and put a lot of money on stocks.

The idea that should be more conservative with age is good, but that does not mean that you should be reckless at any point (by putting too much of your 401K funds in stocks).

Nothing can replace crucial thinking and experience. The problem with experience is that it comes at a very high cost. And what experience tells is that nobody will care about your retirement funds unless you do. Fund families like Vanguard and Fidelity and individual fund managers are more inclined to behave in a ways which helps to makes them quick bucks for themselves not so much for long term return for investors. 

Lifecycle funds

The simplest variant is based on use of "prepackaged" target-date funds. Approximately half of 401K plans offer at least one such plan.

Vanguard now propose a lot of such funds called Retirement 2005, 2010, 2015 and so on.  They failed the test of 2008 and managers of those funds should be fired for incompetence and Vanguard officers should be suid for criminal negligence. . 

As one can expect they played the same old dirty game with your money -- promoting oversized stocks allocation and collecting additional fees due to this. At the same time they exposed investors to outsized risk under the facade of respectability with a lot of empty word about some pseudo-scientific allocation scheme. 

Asset allocation fiasco does not matter managers too much -- they are playing with your money and their bonuses for a successful year are too good to miss. Also you are paying additional fees as those are families of funds. 

As By Will Ashworth  noted (Winners And Losers In Defined Contribution Plans):

Vanguard's 2008 study of the 2,200 defined contribution plan's found that "despite the exceptional volatility that marked the period, the saving and investment behavior of defined contribution plan participants changed only marginally." That's definitely a good thing. Not so good is that 37% of plan participants invested in the target-date funds that were offered. These funds are the "in" product right now and an easy option for employers and employees, but they haven't been properly regulated, creating asset allocation fiascoes. I'd think twice about using them.

Here is one testament of fund managers incompetence in managing 401K investors money ( The Mess That Greenspan Made Target-date funds disappoint (February 06, 2009))

Should anyone be surprised that "target-date" retirement funds failed to shield investors from the storm last year?

In recent years, these were said to be the savior of 401k plans. The idea behind them was simple enough - just keep piling money into the fund whose name corresponds to the year you plan to retire, and some manager somewhere will take care of the rest by buying you a heavy helping of stocks when you're decades away from calling it quits, then shifting to a heavier weighting of bonds as you get older. <> According to this report in MarketWatch, things aren't exactly working out as planned.

Target-date retirement funds were supposed to be the greatest thing since sliced bread. Then 2008 happened. And all of the 264 target-date funds sold by the 39 mutual fund firms that market them performed poorly and contrary to expectations.

Indeed, the most conservative target-date retirement funds - those designed to produce income - fell on average 17% in 2008 and the riskiest target date retirement funds - designed for those retiring in 2055 - fell on average a whopping 39.8%, according to a recent report from Ibbotson Associates, a Morningstar company.

Not a single target-date fund had a positive return, according to Tom Idzorek, Ibbotson's director of research and author of the report.

As if there wasn't already enough working against conventional wisdom when it comes to retirement planning, you get results like this.

If I still had a 401k, the bulk of it would probably still be in one of those stable value funds - they always seemed to produce a decent positive return even in the worst of times, but then you never know which insurance company is going to run into trouble these days.

Apparently, no matter how close to retirement you were - at a point in your life where you want stable income - the target-date funds failed.

But what was especially troubling, according to Idzorek, was the disparity in performance among funds for those in or near retirement. Target-date funds designed for those retiring in 2010 -- next year -- were all over the map. The best of the 31 funds with 2010 in their name fell 3.5%, while the worst fell 41.3%.

What gives? To understand the problem, you have to get under the hood of these funds. In short, target-date funds are collections of other mutual funds actively managed by an adviser. Typically, the adviser buys a mix of stock and bond funds, usually from the in-house fund family, and then adjusts the mix over time, reducing the percentage invested in risky assets -- stock funds -- the closer the fund gets to its target date.

But every fund firm has a different take on what a target-date fund is and how it should be managed. Each firm has its own theory on what the mix of stock and bond funds should be. And each firm has its own theory on what's called the glide path, how the mix of stock and bond funds should change as the fund nears its target date.

Thus, funds with the same target date could have entirely different stock-bond mixes: one firm's 2010 might have 20% in stocks while another's could have 40%.

There's a good discussion of risk tolerance and risk capacity at the end, though nothing on the subject of "risk" that is anywhere close to the inanity of this item from a couple weeks ago. The entire article is well worth a look.

 

Notes on classic 100-your_age strategy and rebalancing

The most basic and probably the oldest of lifecycle strategies is (100-your_age)% stock-bond strategy  The key idea here is that "Complexity Can Backfire". This is also a viable strategy if your 401K plan does not provide any lifestrategy funds. Also it is unclear what is algorithm of rebalancing that, say, Vanguard is using and bad (for example blind annual) algorithms might negatively affect returns.

A popular rule of thumb is to subtract your age from 100. The difference represents the percentage of stocks you should keep in your portfolio. For example, if you are age 40, 60 percent (100 minus 40) of your portfolio should consist of stock. However, you may want to modify the result after considering other factors, such as your age, risk tolerance, and financial goals.

The American Institute of Certified Public Accountants

My simulations had shown that binary mix of large indexes using 100-your_age mix of stocks and your_age% bonds for the historical period used (reader beware!) provides better average returns then either 100% of stocks or 100% of bonds. There are exceptions -- for those who retired in June 2000 with all stock portfolio and converted it into cash would provide better returns (only if they sold it immediately).

For baby boomers and the period that I used in simulation runs (ten year period with start dates varied from 1990 to 1996) it has less risk and higher median returns then all bond portfolio.

Although it looks like defensive strategy: maximum is less the in all stock portfolio but minimum is substantially higher it actually provides better returns in more then 80% simulation cases in my 1990-1996 runs.  We should admit that there its a little bit too simplistic and there is not too much scientific evidence about viability of  this strategy in various market conditions other then the name "classic" and obvious simplicity. Rephrasing Churchill it might be even bad strategy, but other mentioned above might be even worse.  In this case you can beat 100% stable value fund investing strategy for the last ten years -- no small trick for any 401K investor :-). At least it is easy to understand why it is improves returns and thus can fine-tune it.

Rebalance or not to rebalance (or to be exact when rebalance) is another important question. I do not know the answer. One thing that is important --  you should definitely avoid blind yearly rebalancing (a la "Intelligent Investor" recommendations).  The right time for rebalancing are abnormal differences in returns on your stock and bond parts of the portfolio. That means that it makes sense to rebalance only if the difference with projection exceeds, say, 10% or 20%. 

You can also try to use value-averaging based strategy approximating the amount you should have in stocks and bond at retirement and making compensating contributions when the difference exceed certain percentage points.  In this case you need to create a spreadsheet with the simulated life investment growth based on assumption that the stock index portion should generally return 7% a year and bonds index around 5% a year. If they fail to do so you simply need to contribute more during the particular year but this way you will get the final amount no matter how the market will behave. Still you need to increase your cash portion of bond portfolio as bond fund doe not provide preservation of your principal if you do not keep them to maturity.  If you are lucky and start with several good years you will have a sizable stable value reserves from over-performance of say, stock part of the portfolio, the reserves that you can use during bad years for compensating lower returns.



Etc

FAIR USE NOTICE This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit exclusivly for research and educational purposes.   If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. 

ABUSE: IPs or network segments from which we detect a stream of probes might be blocked for no less then 90 days. Multiple types of probes increase this period.  

Society

Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy

Quotes

War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes

Bulletin:

Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least


Copyright © 1996-2016 by Dr. Nikolai Bezroukov. www.softpanorama.org was created as a service to the UN Sustainable Development Networking Programme (SDNP) in the author free time. This document is an industrial compilation designed and created exclusively for educational use and is distributed under the Softpanorama Content License.

The site uses AdSense so you need to be aware of Google privacy policy. You you do not want to be tracked by Google please disable Javascript for this site. This site is perfectly usable without Javascript.

Original materials copyright belong to respective owners. Quotes are made for educational purposes only in compliance with the fair use doctrine.

FAIR USE NOTICE This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to advance understanding of computer science, IT technology, economic, scientific, and social issues. We believe this constitutes a 'fair use' of any such copyrighted material as provided by section 107 of the US Copyright Law according to which such material can be distributed without profit exclusively for research and educational purposes.

This is a Spartan WHYFF (We Help You For Free) site written by people for whom English is not a native language. Grammar and spelling errors should be expected. The site contain some broken links as it develops like a living tree...

You can use PayPal to make a contribution, supporting development of this site and speed up access. In case softpanorama.org is down you can use the at softpanorama.info

Disclaimer:

The statements, views and opinions presented on this web page are those of the author (or referenced source) and are not endorsed by, nor do they necessarily reflect, the opinions of the author present and former employers, SDNP or any other organization the author may be associated with. We do not warrant the correctness of the information provided or its fitness for any purpose.

Last modified: September 12, 2017