A volatility-managed target date fund adjusts equity exposure based on market volatility rather than age alone, improving risk control and retirement wealth outcomes while remaining practical to implement.
Interested in having your article published in the Financial Analysts Journal? Find out how.
Abstract
This article proposes a volatility-managed target date fund (TDF) that scales the equity weight of a standard age-based glide path to align realized portfolio volatility with the target volatility implied by the glide path. Stationary-bootstrap simulations using a century of US market data show that the volatility-managed TDF delivers a more stable risk profile and improves the terminal-wealth distribution relative to the static TDF. These results hold for a band-constrained implementation that limits deviations from the glide path, after accounting for transaction costs, over shorter investment horizons, and across alternative glide-path specifications, volatility estimation methods, and labor income assumptions. The evidence suggests that volatility management offers a practical enhancement to conventional glide-path design.