Simple Allocation Rules and Optimal Portfolio Choice Over the Lifecycle

Victor Duarte, Julia Fonseca, Aaron S. Goodman and Jonathan Parker

No 29559, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a machine-learning solution algorithm to solve for optimal portfolio choice in a lifecycle model that includes many features of reality modelled only separately in previous work. We use the quantitative model to evaluate the consumption-equivalent welfare losses from using simple rules for portfolio allocation across stocks, bonds, and liquid accounts instead of the optimal portfolio choices, both for optimizing households and for households that undersave. We find that the consumption-equivalent losses from using an age-dependent rule as embedded in current target-date/lifecycle funds (TDFs) are substantial, around 2 to 3 percent of consumption, despite the fact that TDF rules mimic average optimal behavior by age closely until shortly before retirement. Optimal equity shares have substantial heterogeneity, particularly by wealth level, state of the business cycle, and dividend-price ratio, implying substantial gains to further customization of advice or TDFs in these dimensions.

JEL-codes: C61 D15 E21 G11 G51 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-big, nep-cmp and nep-mac
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