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Optimal Portfolio Choice for Long‐Horizon Investors with Nontradable Labor Income

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  • Luis M. Viceira

Abstract

This paper examines how risky labor income and retirement affect optimal portfolio choice. With idiosyncratic labor income risk, the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors, consistent with the typical recommendations of investment advisors. Increasing idiosyncratic labor income risk raises investors' willingness to save and reduces their stock portfolio allocation towards the level of retired investors. Positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors.

Suggested Citation

  • Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long‐Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, April.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:2:p:433-470
    DOI: 10.1111/0022-1082.00333
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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