Optimal Age-Based Portfolios with Stochastic Investment Opportunity Sets

In an environment with stocks and short-term debt, random changes in the risk- reward frontier produce hedging demands for equities, implying that portfolio policies supporting optimal life-cycle consumption are rarely mean-variance e¢ cient. Pursuing optimal life-cycle portfolio policies is technologically feasible but it represents a sig- ni?cant burden for individuals and ?nancial ?rms acting as ?duciaries. As a result, investors often rely on relatively simple investment heuristics, most often age-based portfolio policies that rebalance the investor?s portfolio as a function of age alone. We ?nd that (i) the welfare losses associated with these policies are often negligible, so that the trade-o¤ between ?rst-best policies and simpler optimal age-based policies likely favors the approximate policy, and that (ii) not only do initial age-based portfolios display the same overall pattern as ?rst-best portfolios but they are also always within the same order of magnitude.