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0 comments / 14/01/2022 / Stephanie Scoles

Exponential Glide Paths

Vol. 20, No. 1, 2022
by Moshe Levy and Haim Levy

In the absence of market-timing ability, investors are better-off keeping their asset allocation constant through time. Target-date funds help reduce variation in the asset allocation, by taking into account that human capital, which is a part of the investor’s total portfolio and is typically considered to be bond-like, diminishes with age. To compensate, target date funds reduce the allocation to equities in the financial portfolio over time. Funds almost universally do so in a linear fashion, following straight-line glide paths. We show that linear glide paths imply two systematic deviations from constant asset allocation, and suggest a simple correction, the exponential glide path. Exponential glide paths lead to a typical increase of 5–22% in welfare relative to linear glide paths.

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