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 efficient. Pursuing optimal life-cycle portfolio policies is technologically feasible but it represents a significant burden for individuals and financial firms acting as fiduciaries. 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 find that (i) the welfare losses associated with optimal age-based policies are often negligible, so that the trade-off between the first-best and these simpler policies likely favors the latter, and that (ii) not only do initial age-based portfolios display the same overall pattern as first-best portfolios but they are also always within the same order of magnitude