Lean Advice for New Investors

Abstract

As defined benefit pensions have been replaced by investor-directed defined contribution plans, implementing sound investment policies for retail investors of modest means has become a problem of increasing urgency. This group comprises most of the investor population across all countries. In the U.S. it is characterized by inadequate saving, failure to take advantage of materially higher payout for delayed Social Security benefits, extensive credit card debt, and pursuit of naïve investment policies. While sophisticated financial advice is available to large investors, the associated high costs prohibit access by many others. This paper provides an affordable prescriptive blueprint for them, particularly for new investors. While somewhat US-centric, our framework can be put to practical use in any country. We envision implementation as a low-cost tier service using simple technology that permits mass customization with limited in-person contact.

Keywords: asset allocation, retail investor, robo-advisor

JEL Classification: C58, G11, G51