Measuring the Performance of Life-Cycle Asset Allocation

Chapter
Part of the International Series on Consumer Science book series (ISCS)

Abstract

The United States’ aging population puts pressure on the pension system. Pension reforms consider putting more weight on individually managed retirement savings. Public policy and financial planners, being concerned with households making wise asset allocation decisions, need measures to evaluate individual investment performance. In this chapter, we illustrate two measures for the evaluation of asset allocation performance: a preference-free measure and a preference-based measure. We compare the suitability of both measures along several dimensions. The choice of the measure turns out to be important for the ranking of the performance of asset allocation decisions, and thus great care should be taken when deciding on public policy aimed at improving asset allocation behavior. Furthermore, we show that some classical rules of thumb used to mimic optimal life-cycle asset allocation strategies do not necessarily improve investment performance.

Keywords

Income Expense 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of Finance, School of Business and EconomicsMaastricht UniversityMaastrichtThe Netherlands
  2. 2.Department of Actuarial Science, Risk Management and Insurance, 5194 Grainger Hall , School of BusinessUniversity of WisconsinMadisonUSA

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