Rule-based Strategies for Dynamic Life Cycle Investment

TL;DR

This paper develops and evaluates rule-based investment strategies for pension funds, demonstrating their advantages over static and dynamic programming approaches in achieving reliable retirement income with fewer transactions.

Contribution

It introduces a novel rule-based approach for dynamic life cycle investment, incorporating a matching portfolio without risk-free assets, and compares it with existing methods.

Findings

Dynamic rule-based strategies outperform static ones in achieving target income.

Rule-based strategies offer more stable asset allocations and fewer transactions.

The combined rule-based and dynamic programming approach enhances performance.

Abstract

In this work, we consider rule-based investment strategies for managing a defined contribution saving scheme under the Dutch pension fund testing model. We found that dynamic rule-based investment can outperform traditional static strategies, by which we mean that the pensioner can achieve the target retirement income with higher probability and limit the shortfall when target is not met. In comparison with the popular dynamic programming technique, the rule-based strategy has a more stable asset allocation throughout time and avoid excessive transactions, which may be hard to explain to the investor. We also study a combined strategy of rule based target and dynamic programming in this work. Another key feature of this work is that there is no risk-free asset under our setting, instead, a matching portfolio is introduced for the investor to avoid unnecessary risk.