The impact of major life events on household asset portfolio rebalancing

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.