The research conducted by Mathieu Pellerin, a senior researcher and vice president at Dimensional Fund Advisors, suggests that investing based on three factors (size, value, and profitability) can significantly improve retirement outcomes. Pellerin’s study examined the impact of pursuing equity premiums through a hypothetical investor’s lifecycle, from the accumulation period to the decumulation phase. The results showed that premium targeting increased retirement assets by 22% when using historical data and by 20% when using simulations. The premium-targeting portfolio also had a slightly higher average return than the broad market index, overcoming its slightly higher volatility.
Additionally, Pellerin investigated the failure rates in the decumulation phase when withdrawing 4% annually, and the potential increase in bequests at the end of the decumulation phase. The findings revealed that the premium-targeting index had a lower failure rate and a higher median bequest as a percentage of initial assets, indicating better overall financial outcomes.
Pellerin concludes that the benefits of premium targeting apply to all stages of life, particularly for retirees who prioritize long-term financial objectives. Instead of investing in ETFs or mutual funds that track the S&P 500, Pellerin suggests considering premium-targeting ETFs or mutual funds that focus on factors like size, profitability, and value. However, he also notes that there is a certain level of risk and potential underperformance involved, requiring individuals to evaluate the trade-off they are willing to make. Overall, Pellerin emphasizes the attractiveness of core investing for everyone, but especially for retirees aiming to meet their long-term financial goals.