Investing Over the Life Cycle

John Y. Campbell and Luis M. Viceira

in Strategic Asset Allocation

Published in print January 2002 | ISBN: 9780198296942
Published online November 2003 | e-ISBN: 9780191596049 | DOI:

Series: Clarendon Lectures in Economics

 Investing Over the Life Cycle

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This chapter uses a life‐cycle model calibrated to microeconomic US data to examine financial asset allocation strategies of working households saving for retirement. For typical US households with relatively safe labour income streams, risky investments should be extremely attractive when they are young, have modest savings and have many years until retirement; but risky assets should be less attractive later in life, as human wealth declines and financial assets accumulate. Households whose income comes from private businesses, which are exposed to many of the same risks as publicly traded companies, should find risky investments in stocks less attractive at all ages. Households with high‐risk aversion should be cautious investors both because of their high‐risk aversion and their tendency to accumulate greater precautionary savings. Impatient households, on the other hand, accumulate relatively little savings; financial risks are relatively unimportant for them compared to income risks, and thus they can afford to invest more aggressively.

Keywords: age effect; asset allocation; income risk; labour income; life‐cycle investing; precautionary savings; private equity; retirement; risk aversion; USA

Chapter.  10620 words.  Illustrated.

Subjects: Financial Markets

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