Rule-based strategies for dynamic life cycle investment

Journal article (2022)

Authors

T.R.B. den Haan Delft Institute of Applied Mathematics , Ortec Finance
K. W. Chau Rijksuniversiteit Groningen
M van der Schans Ortec Finance
C.W. Oosterlee Centrum Wiskunde & Informatica (CWI), Universiteit Utrecht
Research Group
Geo-engineering (CEG) (TU Delft)
Copyright: © 2022 T.R.B. den Haan, K. W. Chau, M. van der Schans, C.W. Oosterlee
DOI: https://doi.org/10.1007/s13385-021-00283-0
Dynamic programming Pensions Defined contribution Life cycle investing Rule-based strategies
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Published Date

2022

Language

English

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Faculty

Civil Engineering & Geosciences

Department

Geoscience and Engineering

Research Group

Geo-engineering

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.