Abstract
In traditional life cycle models, the equity-bond glide path shifts investment allocation from riskier assets to relatively safer assets as investors approach retirement. In this paper, we develop a smart beta glide path which seeks to take advantage of broad, persistent patterns within asset classes to identify securities with higher risk-adjusted returns than the market. Within equities, investors can shift from return-enhancing strategies — like value, momentum, size, and quality — to risk-reducing strategies like minimum volatility as they move through their life cycles. Adopting smart beta glide paths may improve Sharpe ratios by up to 20% over a standard equity-bond glide path.
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