Optimal Portfolio Choice for Long‐Horizon Investors with Nontradable Labor Income
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- 1 April 2001
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 56 (2) , 433-470
- https://doi.org/10.1111/0022-1082.00333
Abstract
This paper examines how risky labor income and retirement affect optimal portfolio choice. With idiosyncratic labor income risk, the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors, consistent with the typical recommendations of investment advisors. Increasing idiosyncratic labor income risk raises investors' willingness to save and reduces their stock portfolio allocation towards the level of retired investors. Positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors.Keywords
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