Macroscope | Save while young, fret over asset allocation in old age

Concentrate on savings when you are young, but worry more about making the right asset allocation as you get closer to retirement.

That’s the finding of a new paper from investment firm Research Associates.

Broadly speaking, there are two principal ways to amass a capital sum: one is to put money aside, the other to invest it cleverly. Alas, far more ink, effort and blood is spilled trying to beat the market than in trying to get people to simply save early and often.

There are many reasons for this. For one, it is easier to sell outperformance, which gives the illusion of a tactic which is self-funding. Much harder to sit down with a client and tell them that their savings are insufficient for their needs than to soft soap them with the prospect of effortless and sacrifice-less gain.

None of this makes asset allocation unimportant, but only implies that it often gets attention which would better be spent elsewhere. Indeed, the authors suggest, sometimes the usual strategy of taking on more risk early and less late can have unintended and negative consequences.

The study looked at target date funds (TDFs), the default option in many defined contribution retirement plans. TDFs make asset allocation choices in an attempt to maximize gains by some specific date, often the desired retirement date of the saver.