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RAPPORT

Lifecycle investing: From theory to practice

DC investment focus

The concept of matching asset allocations to individuals’ risk preferences has been around for many decades now and has developed significantly over time. As the theory developed, the concept of lifecycle investing – varying asset allocation according to an individual’s age – was born.

Written by Oliver Warren, Investment Solutions Consultant at Aegon Asset Management and Gosse Alserda, Investment Strategist at TKP Investments.

This publication is the first in a series in which we will explore some of the factors influencing lifecycle construction and consider how Defined Contribution (DC) pension schemes may incorporate them into their lifecycle construction process.

Risk preferences vary between individuals and, in the pensions context, measure the extent to which people are happy to take greater risk in exchange for higher expected returns. Determining people's risk preferences allows us, in addition to purely looking at the monetary value of a given pension outcome, to also look at the utility which people will get out of that pension outcome. Risk averse investors will place greater value on the certainty of their pension outcome and will be prepared to forgo a higher potential pension for this certainty. Risk tolerant investors, on the other hand, are willing to take greater risks for a higher potential pension.

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