Investing for a Distant Goal: Optimal Asset Allocation and Attitudes toward Risk

Jim Musumeci, Southern Illinois University

September 1998 | Issue # 56

A hallmark of a defined contribution pension plan is the opportunity it provides participants to shape their own retirement to reflect their individual needs and attitudes. At the same time, the opportunity presents a significant challenge, as participants are faced with the complex task of deciding how to allocate or re-allocate retirement plan investments best over time.

TIAA-CREF has always provided extensive education and information to participants in the form of pamphlets, booklets, seminars, software, and other media to assist them in making choices. Recently, TIAA-CREF has moved further, offering individuals specific asset allocation advice that considers their personal characteristics and financial situation, as well as their comfort level regarding risk. The model underlying this advice was developed based on the extensive experience of TIAA-CREF staff, as well as on formal theoretical and empirical studies conducted by financial economists.

This article by Professor Jim Musumeci, Department of Finance, Southern Illinois University at Carbondale, summarizes his research on the subject of optimal asset allocation. It describes and presents an academic economist’s approach to thinking about the issues involved in asset allocation. Professor Musumeci’s work emphasizes the importance of individuals’ attitudes toward risk and the changing level of their accumulations in deter-mining the best allocations for those saving for a distant goal.

It is important to note that the opinions and analysis presented in this article are the results of the academic work of Professor Musumeci. The article is presented for your general interest only and should not be interpreted as or considered to be investment advice from TIAA-CREF.

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017