An inverse glide-path strategy, where investors increase their exposure to growth assets later in life, would have produced better results over the past 140 years than the traditional life-cycle approach, according to enhanced beta index provider Research Affiliates.
The company did a back test of investment strategies where an investor moved gradually from an 80 per cent exposure to growth assets to a 20 per cent exposure close to retirement, the traditional glide-path approach.
It then compared the results of the best, median and worst scenarios with those of a static 50/50 portfolio and a portfolio that moved from 20 per cent in growth assets to 80 per cent later in life.
It used 141 years of stock and bond market returns from 1871 to 2011, and tracked various generations of investors, beginning with the first investor who started working in 1871 and retired at the end of 1911, while the last started in 1971 and retired at the end of 2011.
This gave the investment results for 101 workers over the period.
The research assumed investors would put in $1000 a year in real terms for 41 years, adjusting contributions for inflation.
Research Affiliates found the traditional glide-path strategy produced an average investment outcome of $124,460 across the 101 investors, while the best result came in at $211,330 and the worst at just $49,940.
A static portfolio with 50 per cent in equities and 50 per cent in bonds produced an average of $137,870, with the best outcome slightly lower than the glide-path strategy at $209,110, but the worst outcome was slightly higher than the glide-path strategy at $51,800.
But the inverse glide-path strategy produced an average of $152,060, with the best outcome at $286,920 and the worst at $53,040.
Despite the fact the standard deviation of an inverse glide-path strategy was higher at $57,010 compared to $37,670 for the traditional glide-path strategy, the worst result of the inverse strategy was still better than the traditional one, and so was the best.
"Critics may argue - correctly - that past is not prologue," Research Affiliates chief executive Robert Arnott said.
"This outcome is presumably due to higher real returns for stocks and bonds later in the 141-year period (for example, during the immense bull market from 1982 through 1999), leading to a slight tendency for investors to benefit from ramping up risk later rather than earlier in life."
Therefore, the same pattern might not repeat itself in the future.
But Arnott found that a random return distribution would have produced largely the same outcomes.
"To address this criticism, we put the 141-year history into a lottery, with each year's returns randomly drawn," he said.
"It delivers the same relative ranking for the merits of glide-path versus static 50/50 versus inverse glide-path. The inverse finishes on top again."
Arnott also tested the strategies under a 'new normal' scenario, assuming lower returns, lower yields and higher volatility.
It found the same outcome again.
"Glide-path - with less risk taken late in our working lives - is inferior to its counterintuitive inverse," Arnott said.
