Rule-based Strategies for Dynamic Life Cycle Investment

Abstract: In this work, we consider rule-based investment strategies for managing a defined contribution saving scheme under the Dutch pension fund testing model. We found that dynamic rule-based investment can outperform traditional static strategies, by which we mean that the pensioner can achieve the target retirement income with higher probability and limit the shortfall when target is not met. In comparison with the popular dynamic programming technique, the rule-based strategy has a more stable asset allocation throughout time and avoid excessive transactions, which may be hard to explain to the investor. We also study a combined strategy of rule based target and dynamic programming in this work. Another key feature of this work is that there is no risk-free asset under our setting, instead, a matching portfolio is introduced for the investor to avoid unnecessary risk.