Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk

Posted: 30 May 2008  

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Barry J. Nalebuff

Yale University - Yale School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: May 27, 2008

Abstract

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

Suggested Citation

Ayres, Ian and Nalebuff, Barry J., Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk (May 27, 2008). Available at SSRN: https://ssrn.com/abstract=1139110 or http://dx.doi.org/10.2139/ssrn.1139110

Ian Ayres (Contact Author)

Yale University - Yale Law School ( email )

P.O. Box 208215
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203-432-2592 (Fax)

Yale University - Yale School of Management

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Barry Nalebuff

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5968 (Phone)
203-432-6974 (Fax)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-5968 (Phone)

HOME PAGE: http://barrynalebuff.com

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