Written By: Charles B. Hatcher
Using Ibbotson?s Historical Data on Securities prices, simulations were run to determine the optimal portfolio for an individual who simultaneously consumes and invests in order to finance current consumption. The simulations assumed that households consume according to the Life Cycle Income Hypothesis: each year, they consumed in proportion to their life expectancy. The results yielded several counterintuitive results, the most prominent being that under all assumptions, retiree portfolios should be less aggressive than those using a simple 1 year time horizon.
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