Rule-based strategies for dynamic life cycle investment
T.R.B. den Haan (TU Delft - Delft Institute of Applied Mathematics, Ortec Finance)
K. W. Chau (Rijksuniversiteit Groningen)
M. van der Schans (Ortec Finance)
Cornelis W. Oosterlee (Centrum Wiskunde & Informatica (CWI), Universiteit Utrecht)
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Abstract
In this work, we consider rule-based investment strategies for managing a defined contribution pension savings scheme, under the Dutch pension fund testing model. We find that dynamic, rule-based investment strategies can outperform traditional static strategies, by which we mean that the investor may achieve the target retirement income with a higher probability or limit the shortfall when the target is not met. In comparison with dynamic programming-based strategies, the rule-based strategies have more stable asset allocations throughout time and avoid excessive transactions that may be hard to explain to an investor. We also study a combined strategy of a rule-based target with dynamic programming. A key feature of our setting is that there is no risk-free asset, instead, a matching portfolio is introduced for the investor to avoid unnecessary risk.