A Lifetime of Asset Allocation: Realizing a Real Retirement

Abstract

In this research, we optimized fixed, glide path and dynamic portfolios, aimed at providing a solid pension adjusted for inflation. We optimized these portfolios for two performance functions that take inflation rates into account. We compared the performance of these portfolios in terms of replacement rates. This research expands on previous research by considering dozens of assets ranging from standard to exotic asset classes, instead of only a handful well-behaved assets classes. In addition, we propose an innovative performance function that enables agents to control the trade-off between return and downside risk over time, while simultaneously controlling the capital accumulation process. Second, we propose a grid creation method used to speed up the procedure described by van Binsbergen and Brandt (2007) for solving dynamic portfolio problems. We found several well performing pension schemes, in terms of risk and return. The main conclusion throughout this paper is the importance of asset classes carrying a high risk premium, for long term capital accumulation.