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Life-cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk

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Author Info
Ian Ayres
Barry J. Nalebuff

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Abstract

By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies?both traditional life-cycle investments and 100%-stock investments. The expected retirement wealth is 90% higher compared to life-cycle funds and 19% higher compared to 100% stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14094.

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Date of creation: Jun 2008
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Handle: RePEc:nbr:nberwo:14094

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D33 - Microeconomics - - Distribution - - - Factor Income Distribution
G1 - Financial Economics - - General Financial Markets
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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This page was last updated on 2008-10-11.

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