The Impact of Major Life Events on Australian Household Financial Decision-Making and Portfolio Rebalancing

26 Pages Posted: 20 Aug 2016

Date Written: August 19, 2016

Abstract

This paper uses household-level longitudinal data from the Household, Income, and Labour Dynamics in Australia (HILDA) survey to gain insights into the asset portfolio rebalancing responses of households experiencing a severe financial shock. The four major life events we consider are serious illness or injury, death of a spouse, being fired or made redundant, and separation from a spouse. The eleven asset classes are bank accounts, cash investments, equities, superannuation (pensions), cash-in values of life insurance policies, trust funds, owner-occupied housing, investor housing, business assets, vehicles, and collectibles. We use static Tobit models to assess the impact of the life events on asset class shares in household portfolios and dynamic Tobit models to investigate the magnitude and duration of the financial shocks over time. We find that serious illness and injury, loss of employment, and separation cause households to rebalance portfolios in ways that have detrimental impacts on long-term wealth accumulation. In particular, when households experience illness/injury or employment loss, they tend to reduce their equity portfolio share in both the short- and long-term with the implication of reduced portfolio returns, while those that experience separation reduce the portfolio share of owner-occupied housing also immediately, but then increase it over the longer term, thereby causing concern about transaction costs. The insights gained from these studies are particularly important for financial planners, as it may be possible to hedge wealth adverse impacts through better financial education, insurance products, or general financial preparedness.

Keywords: Household finance, Asset portfolios, Portfolio rebalancing, Life events

JEL Classification: C24, D14, G10

Suggested Citation

West, Tracey and Worthington, Andrew C., The Impact of Major Life Events on Australian Household Financial Decision-Making and Portfolio Rebalancing (August 19, 2016). Available at SSRN: https://ssrn.com/abstract=2826337 or http://dx.doi.org/10.2139/ssrn.2826337

Tracey West

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Andrew C. Worthington (Contact Author)

Griffith University ( email )

170 Kessels Road
Nathan, Queensland 4111
Australia
+61 (0)7 3735 4273 (Phone)
+61 (0)7 3735 3719 (Fax)

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