Dynamic lifecycle investment
With the upcoming new pension scheme, in which fewer risks will be shared, lifecycle investing will become more prominent in the coming years. The idea of lifecycle investing is that the older you get, the more low-risk investments you make. The most familiar example of lifecycle investing is Bogle’s rule, which recommends that the percentage of your high-risk investment equals 100% minus your age. Thus, a 20-year old invests 80% in shares and someone who retires at the age of 67 only 33%.
Static versus dynamic investment
Lifecycles such as Bogle’s rule are static lifecycles, because your investment only depends on your age and not on your financial situation and expectations for the future. In dynamic lifecycles, on the other hand, the percentage of your high-risk investments depends on how things are going. In other words, in static lifecycles everything is fixed beforehand, while in dynamic lifecycles you keep your options open, which, at least in theory, should to be better. The added value of dynamic lifecycles, however, does depend on several things, such as whether you believe in the predictability of the market and the your objective.
Achieve objectives with fewer risks
The objective for pension investments is simple: your pension together with old-age benefits (Dutch: AOW) should replace your salary when you retire at the age of 67. Roughly speaking, the AOW together with your pension comprise approximately 70% of your salary (on average). Lifecycle investing strives to achieve this objective in the best way possible. With dynamic lifecycles, it is possible to dynamically steer towards this objective of 70%. For example, it’s possible to take fewer risks after investments have been very good for a while. That way, the investor prevents taking unnecessary risks!
Additional research into dynamic lifecycle investments
Despite their potential, the use of dynamic lifecycles was limited in the past. The main cause is that it is often difficult to calculate them. Ortec Finance believes that dynamic lifecycles could be of value in the future and is therefore interested in further researching the possibilities. Recently, Jan Peeters Weem, a student of Applied Mathematics at the Technical University of Delft, collaborated with Ortec Finance and wrote his master thesis about determining optimal dynamic lifecycles.
In the near future, Ortec Finance will continue carrying out research into dynamic lifecycles and their practical applications. This way, we hope that investors saving for their pension can achieve their objective with fewer risks.
Do you want more information about dynamic lifecycle investing? Feel free to contact Martin van der Schans, Chantal de Groot or Sacha van Hoogdalem.