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


  • Luis M. Viceira

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    • Harvard University, CEPR and NBER. The author is grateful for comments and suggestions from and discussions with John Y. Campbell, Gary Chamberlain, David Laibson, Gregory Man-Robert Merton, Andrew Metrick, René Stulz, Jaume Ventura, Pietro Veronesi, Philippe Weil and two anonymous referees, and for comments from seminar participants at Columbia University, Cornell University, Duke University, Harvard University, MIT, Northwestern University, New York University, Stanford University, the University of California in Los Angeles, the University of Chicago, the University of Pennsylvania, the University of Rochester and the 1997 NBER Summer Institute. The author gratefully acknowledges the financial support of the Bank of Spain.


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.