Seminar in applied mathematics and statistics
SPEAKER: Gaurav Khemka (Australian National University)
TITLE: How sub-optimal are age-based life-cycle investment products?
ABSTRACT: Theoretical life-cycle utility maximization models show that optimal investment strategies in the pre-retirement phase are a function of the investor's age and balance. However, default strategies available to investors are usually only a function of age. These investment strategies are also characterized by the no borrowing and short-selling constraints. While these strategies are sub-optimal in nature, they are the norm. In this paper, we propose four methods of developing investment strategies that are approximations of the theoretical optimal but have the characteristics of the default investment strategies seen around the world. We quantify the level of sub-optimality of these investment strategies and show that despite being sub-optimal they perform better than the strategies currently available to
investors and lead to better retirement outcomes.