Analysing the c-minus-age strategy for life-cycle investing

Abstract

The c-minus-age strategy is a popular strategy for life-cycle investing. When applying the c-minus-age strategy, an investor first chooses an indirect preference parameter c and at age t will hold a percentage of c minus t in equity assets. In this article, we use a linear and a multiplicative mean-variance utility function to quantitatively analyse the term structure of the mean-variance tradeoffs implied by the c-minus-age strategy. We also provide an optimal procedure to determine c, based on the two direct preference parameters, elicited from an investor, of a multiplicative mean-variance utility function.

Notes

¹ Fabozzi et al.(2002) presented the commonly used indexes for asset classes and justified these indexes not only with longer histories, but also with more accuracy.

² Our results may be sensitive to the number of funds (asset classes) in the analysis. Fortunately, Cromwell et al. (2000) found that approximately 70% of the reduction in the portfolio risk can be obtained with a four-fund portfolio.

³ Other figures mapping out the region of c with c = 70, 80, 90, 100, 110 and 120 for different combinations of the growth rates of k ₁ and k ₂ are available upon request.