We examine common asset allocation strategies for retirement investing, considering both static and dynamic approaches, as well as those allocation policies used by leading target-date fund providers. We studied the average performance of each strategy over historical rolling periods (that is, bootstrapping), using actual annual returns starting in 1926. Then we applied the simulation method to review potential future results, as well as to provide additional insight into the structure and characteristics of each approach. We find that, over time, certain static approaches are essentially equivalent to dynamic strategies that reduce equity exposure through time. Further, we find that most target-date fund providers appear to target a dynamic 120 - age equity allocation. We suggest that financial planners consider a 100 percent equity allocation for their clients until approximately 10 years prior to a client's retirement, at which point a more conservative allocation should be employed. Although the average outcome for this approach is technically "better" there is still significant risk associated with this strategy. Consider the outcome should the year prior to reallocation be like 2008, or the inherent difficulties of a large shift from 100 percent equity to 45 percent equity because of tax or other issues. A more moderate reallocation over a few years may be reasonable. This flexibility suggests that financial planners can play a valuable role by helping investors determine the optimal reallocation time and process, in addition to encouraging a larger equity exposure early on to capture the benefits thereof.
Steven Dolvin, William Templeton, and William Rieber. "Asset Allocation for Retirement: Simple Heuristics and Target-Date Funds" Journal of Financial Planning 23.3 (2010): 60-71.