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Dynamic optimization for multi-goals wealth management

Author

Listed:
  • Das, Sanjiv R.
  • Ostrov, Daniel
  • Radhakrishnan, Anand
  • Srivastav, Deep

Abstract

We develop a dynamic programming methodology that seeks to maximize investor outcomes over multiple, potentially competing goals (such as upgrading a home, paying college tuition, or maintaining an income stream in retirement), even when financial resources are limited. Unlike Monte Carlo approaches currently in wide use in the wealth management industry, our approach uses investor preferences to dynamically make the optimal determination for fulfilling or not fulfilling each goal and for selecting the investor’s investment portfolio. This can be computed quickly, even for numerous investor goals spread over different or concurrent time periods, where each goal may be all-or-nothing or may allow for partial fulfillment. The probabilities of attaining each (full or partial) goal under the optimal scenario are also computed, so the investor can ensure the algorithm accurately reflects their preference for the relative importance of each of their goals. This approach vastly outperforms static portfolio strategies and target-date funds, widely used in the wealth management industry.

Suggested Citation

  • Das, Sanjiv R. & Ostrov, Daniel & Radhakrishnan, Anand & Srivastav, Deep, 2022. "Dynamic optimization for multi-goals wealth management," Journal of Banking & Finance, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:jbfina:v:140:y:2022:i:c:s0378426621001515
    DOI: 10.1016/j.jbankfin.2021.106192
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    More about this item

    Keywords

    Goals-based investing; Dynamic programming; Retirement planning;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G50 - Financial Economics - - Household Finance - - - General

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