Life-Cycle Investing and Smart Beta Strategies

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 article, we develop a smart beta glide path that 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 the life cycle. Adopting smart beta glide paths may improve Sharpe ratios by up to 20% over a standard equity-bond glide path.

TOPICS: Retirement, analysis of individual factors/risk premia, portfolio construction