Investing over the life cycle with long-run labor income risk
Abstract: Many financial advisors and much of the academic literature often argue that young people should place most of their savings in stocks. In contrast, a significant fraction of U.S. households do not hold stocks. Investors typically hold very little in stocks when they are young, progressively increase their holdings as they age, and decrease their exposure to stock market risk when they approach retirement. The authors show how long-run labor income risk helps explain this evidence. Moreover, they discuss the effect of long-run labor income risk on the valuation of pension plan obligations, their funding, and the allocation of pension assets across different investment classes.
File(s): File format is application/pdf http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2009/ep_3qtr2009_part2_benzoni_chyruk.pdf
Provider: Federal Reserve Bank of Chicago
Part of Series: Economic Perspectives
Publication Date: 2009
Issue: Q III