The impact of major life events on household asset portfolio rebalancing. Issue 3 (26th June 2019)

• Record Type: Journal Article
• Authors: West, Tracey; Worthington, Andrew
• Is Part Of: Studies in economics and finance. Volume 36:Issue 3(2019)
• Page Start: 334
• Page End: 347
• Publication Date: 2019-06-26
• Subjects: Asset portfolios -- Household finance -- Life events -- Portfolio rebalancing; Economics -- Periodicals; Finance -- Periodicals; 330
• DOI: 10.1108/SEF-11-2017-0318
• Languages: English
• ISSNs: 1086-7376

Abstract

Abstract : Purpose: This paper aims to model the asset portfolio rebalancing decisions of Australian households experiencing a severe life event shock. Design/methodology/approach: The paper uses household longitudinal data from the Household, Income, and Labour Dynamics in Australia (HILDA) survey since 2001. The major life events are serious illness or injury, death of a spouse, job dismissal or redundancy and separation from a spouse. The asset classes are bank accounts, cash investments, equities, superannuation (private pensions), life insurance, trust funds, owner-occupied housing, investor housing, business assets, vehicles and collectibles. The authors use both static and dynamic Tobit models to assess the impact and duration of impact of the shocks. Findings: Serious illness and injury, loss of employment, separation and spousal death cause households to rebalance portfolios in ways that can have detrimental effects on long-term wealth accumulation through poor market timing and the incurring of transaction costs. Research limitations/implications: The survey results are only available since 2001, and the wealth module from which the asset data are drawn is self-reported and not available every year. Practical implications: Relevant to policymakers working on the ongoing retirement of the "baby boomer" generation and for financial planners guiding household investment decisions. Originality/value: Most research on shocks to household wealth concern a narrower range of assets and only limited shocks. Also, this is one of the few studies to use a random effects model to allow for unspecified heterogeneity among households.