Equity Allocations and the Investment Horizon
A Total Portfolio Approach
DOI:
https://doi.org/10.61190/fsr.v11i2.4727Keywords:
Life-cycle hypothesis, Retirement accounts, Long time horizon, Asset allocation, Total wealth portfolioAbstract
We offer a streamlined life-cycle model that provides support for the common advice given to investors to hold large initial equity allocations among financial assets and then reduce them as retirement nears. We examine how total portfolio wealth varies at different horizons. We find that if the financial component of a total retirement portfolio is large (small), compared to anticipated future contributions, then the equity allocation should be reduced (increased) to target that individual's desired risky asset allocation of total wealth. Our examples and historical tests favor allocation strategies that depend on individual financial circumstances and portfolio horizons. But, somewhat surprisingly, even highly risk-averse individuals should choose to hold all equity retirement portfolios when beginning to save for retirement.
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