A Theory of Household Financial Portfolios (Anmol Bhandari, Mikhail Golosov, Judy Yue)
Abstract:
We study the lifecycle allocation of financial wealth for an individual investor facing a general income process, access to multiple asset classes, and short selling constraints. We develop analytical techniq ues that approximate the optimal portfolio choice at any individual history using sufficient statistics that can be directly estimated from micro-leve l labor income data and macro-level asset return data. A key advantage of o ur approach is that it avoids the curse of dimensionality that typically ar ises in incomplete market models with many assets. Leveraging standard tool s from labor economics and finance, we construct these sufficient statistic s for widely available financial assets. Our quantitative findings indicate that a representative U.S. investor should allocate heavily toward value s tocks (i.e., high book-to-market equities) early in life. As retirement app roaches, the portfolio gradually shifts toward a combination of long-durati on domestic and international bonds, a modest position in a broad stock mar ket index (S&P 500) and, potentially, gold. In contrast, the optimal po rtfolio includes no exposure to housing ETFs (REITs) or indices tracking in ternational equities.
DTSTAMP:20260525T074023Z DTSTART:20250707T130000Z DTEND:20250707T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR