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1 May 2007 Financial Analysts Journal Volume 63, Issue 3

Making Investment Choices as Simple as Possible, but Not Simpler

  1. Zvi Bodie, PhD
  2. Jonathan Treussard

Target-date funds (TDFs) for retirement, also known as life-cycle funds, are being offered as a simple solution to the investment task of participants in self-directed retirement plans. A TDF is a “fund of funds” diversified across stocks, bonds, and cash with the feature that the proportion invested in stocks is automatically reduced as time passes. Empirical evidence suggests that a simple TDF strategy would be an improvement over the choices currently made by many uninformed plan participants. This article explores a way to achieve even greater improvement for people who are very risk averse and have high exposure to market risk through their labor.

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