The impact of major life events on household asset portfolio rebalancing

Tracey West and Andrew Worthington

Studies in Economics and Finance, 2019, vol. 36, issue 3, 334-347

Abstract: Purpose - This paper aims to model the asset portfolio rebalancing decisions of Australian households experiencing a severe life event shock. Design/methodology/approach - The paper uses household longitudinal data from the Household, Income, and Labour Dynamics in Australia (HILDA) survey since 2001. The major life events are serious illness or injury, death of a spouse, job dismissal or redundancy and separation from a spouse. The asset classes are bank accounts, cash investments, equities, superannuation (private pensions), life insurance, trust funds, owner-occupied housing, investor housing, business assets, vehicles and collectibles. The authors use both static and dynamic Tobit models to assess the impact and duration of impact of the shocks. Findings - Serious illness and injury, loss of employment, separation and spousal death cause households to rebalance portfolios in ways that can have detrimental effects on long-term wealth accumulation through poor market timing and the incurring of transaction costs. Research limitations/implications - The survey results are only available since 2001, and the wealth module from which the asset data are drawn is self-reported and not available every year. Practical implications - Relevant to policymakers working on the ongoing retirement of the “baby boomer” generation and for financial planners guiding household investment decisions. Originality/value - Most research on shocks to household wealth concern a narrower range of assets and only limited shocks. Also, this is one of the few studies to use a random effects model to allow for unspecified heterogeneity among households.

Keywords: Asset portfolios; Household finance; Life events; Portfolio rebalancing (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-11-2017-0318

DOI: 10.1108/SEF-11-2017-0318

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