Do target date funds that put your portfolio on a glide path offer any advantage over a constant equity portfolio?

Target date funds (also known as life cycle funds) are promoted as an attractive way of saving for retirement. These funds share a common theme of starting at a high equity allocation when the saver is young and declines with the age. The notion that a saver should take less risk as they near retirement is intuitively appealing but are the results likely to be superior to a constant equity allocation with continuous rebalancing? Is the best way of achieving a wealth goal to follow a prescribed glide path, irrespective of how the portfolio has performed with time?

In our recent study we show that target date funds can be replaced with a constant equity portfolio, with lower risk for the lump sum investor and comparable risk for the regular saver. We provide a simple method of estimating the constant equity allocation that provides equivalent performance to a linear glide path. The slope of the glide path has only a modest impact on the equivalent constant equity allocation.

Target date funds are usually a fund of funds and, as such, tend to have higher fees than a balanced fund. After fees, the investor is likely to be better off sticking to the simplicity and lower cost of a constant equity portfolio.