Economic Brief

October 2014, No. 14-10

Investing over the Life Cycle: One Size Doesn't Fit All

Tim Sablik

Financial advisers commonly recommend that young individuals invest more heavily in risky assets than safer assets. Because of their long time horizons, young investors can expect that long-run gains on risky assets typically will outweigh short-term losses. However, the Fed's Survey of Consumer Finances shows that young people generally do not follow this advice. Instead, they invest little or nothing in risky assets initially and increase their holdings gradually as they approach retirement. Economists find that accounting for other risks that young people face can help explain this behavior.

Our Research Focus: Consumer Finance

Additional Resources

Benzoni, Luca, Pierre Collin-Dufresne, and Robert S. Goldstein, "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets are Cointegrated," Journal of Finance, October 2007, vol. 62, no. 5, pp. 2123-2167. (A working paper version is available online.)

Chang, Yongsung, Jay H. Hong, and Marios Karabarbounis, "Labor-Market Uncertainty and Portfolio Choice Puzzles," Federal Reserve Bank of Richmond Working Paper No. 14-13, June, 16, 2014.

Choi, Sekyu, Alexandre Janiak, and Benjamín Villena-Roldán, "Unemployment, Participation and Worker Flows over the Life-Cycle," Barcelona GSE Working Paper No. 617, March 2012.

Cocco, João F., "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Summer 2005, vol. 18, no. 2, pp. 535-567. (A previous version is available online.)

Cocco, João F., Francisco J. Gomes, and Pascal J. Maenhout, "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Summer 2005, vol. 18, no. 2, pp. 491-533. (A previous version is available online.)

Jagannathan, Ravi, and Narayana R. Kocherlakota, "Why Should Older People Invest Less in Stocks than Younger People?" Federal Reserve Bank of Minneapolis Quarterly Review, Summer 1996, vol. 20, no. 3, pp. 11-23.

Topel, Robert H., and Michael P. Ward, "Job Mobility and the Careers of Young Men," Quarterly Journal of Economics, May 1992, vol. 107, no. 2, pp. 439-479. (A working paper version is available online.)

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