Life-cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk

No 14094, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies?both traditional life-cycle investments and 100%-stock investments. The expected retirement wealth is 90% higher compared to life-cycle funds and 19% higher compared to 100% stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.

JEL-codes: D33 G1 G11 G18 H55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age
Date: Written 2008-06
Note: PE

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