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Are Target-Date Retirement Funds Doing Things Backward?

Kitces says his approach would outperform conventional glide paths in most scenarios. If the saver retired during a market boom, the nontraditional strategy could underperform because of the heavy bond allocation -- but there would still be enough assets to cover living expenses. Kitces says that a saver may have to tolerate some periods of underperformance in order to avoid a disaster in an early downturn.

Robert Arnott -- chairman of Research Affiliates, a firm that advises investment companies -- tested how a variety of different portfolio allocations would have performed during the 141 years ended in 2011.

Arnott looked at how a worker would have done if he saved $1,000 annually, starting with 80% of assets in equities in 1871 and gradually lowering the allocation to 20% when he retired after four decades. Then Arnott considered people who started in 1872 and in subsequent years.

Next the researcher considered what would have happened if the theoretical workers held a constant allocation of 50% in equities and 50% in bonds.

The study showed that workers with the static allocation would have ended with average assets of about $137,000, topping the conventional glide path by $13,000. Arnott says that the outperformance of the static portfolio is no fluke.

With the conventional glide path, the worker had a big allocation to stocks in the early years when the portfolio was small. So if the market surged, the portfolio would increase only by a few dollars. In the later years, the conventional portfolio might be large, but a stock rally would not help much because the assets were mainly in bonds. In contrast, the static portfolio had enough stocks to achieve big dollar gains in the later years when the portfolio was large.

Should you dump your target-date fund and shift to balanced funds with 50-50 allocations? Perhaps.

Some top balanced funds have long records of delivering solid results. But many aging investors may still favor the conventional glide paths. As retirees spend down their nest eggs, they may prefer the comfort of knowing that most of the remaining assets are in bonds.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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