How to Invest Over the Life Cycle: A Review
University of Fribourg - Faculty of Economics and Social Science
University of Fribourg (Switzerland) - Chair for Financial Management
We analyse the state of the art in the field of life cycle portfolio choice, a recent strand of the literature on intertemporal portfolio selection. Life cycle models are designed to identify optimal savings and portfolio policies over the lifetime of investors. They can help to improve pension schemes by showing how these could be specifically tailored to the individual employee's circumstances to overcome the "one-size-fits-all" philosophy still prevailing in parts of the mandatory retirement savings system. To facilitate comparison, we first describe set-up, solution method and characteristic results for a basic model and then derive a general framework to classify existing contributions. We highlight the models' strengths and weaknesses and assess their ability to resolve existing portfolio puzzles. Lessons from the literature are summarized and promising areas for further research identified.
Number of Pages in PDF File: 33
Keywords: Personal finance, financial planning, life cycle model, portfolio choice
JEL Classification: G11, D14, D91, H55working papers series
Date posted: December 12, 2006
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