Heuristic portfolio rules with labor income

Marcel Fischer and Marlene Koch

The European Journal of Finance, 2025, vol. 31, issue 11, 1426-1444

Abstract: We propose a heuristic portfolio rule, which significantly simplifies individuals' asset allocation decisions over the life cycle. Under this heuristic, equity exposure is a linear function of the individual's labor-to-wealth ratio and age. When individuals follow our heuristic, welfare gains when switching to the optimal policy are only 0.35% of lifetime consumption (around USD 9,800). Relative to portfolio strategies used by individuals in the data, welfare gains from using our heuristic are about 2.2% (around USD 61,600). Our results are robust to different educational attainments and family structures.

Date: 2025
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DOI: 10.1080/1351847X.2025.2491367

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