Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk
Yale University - Yale Law School; Yale University - Yale School of Management
Barry J. Nalebuff
Yale University - Yale School of Management
May 27, 2008
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.
Keywords: Diversification, Leverage, Retirement, Investment Strategy
JEL Classification: D31, G1, G11, G18, H55
Date posted: May 30, 2008
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