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

50 Pages Posted: 22 Jun 2008

See all articles by Ian Ayres

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: June 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.

Suggested Citation

Ayres, Ian and Nalebuff, Barry, Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk (June 2008). NBER Working Paper No. w14094. Available at SSRN: https://ssrn.com/abstract=1149340

Ian Ayres (Contact Author)

Yale University - Yale Law School ( email )

P.O. Box 208215
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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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