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.

Antecedents and consequences of Personal Financial Management Behavior: a systematic literature review and future research agenda

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Financial distress and COVID-19: evidence from working individuals in India

“…Management of personal finances is often intimidating, which causes individuals to avoid it, leading to false decisions and, ultimately, poor financial health (Boon et al , 2011). The thought of facing a sudden adverse event that could disturb an individual’s family finances such as a job loss, an illness or an income fall, becomes less threatening if the funds are properly planned (West and Worthington, 2019).…”

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“…Based on four measures of diversification, they conclude that diversification is generally poor. A subsequent study (West and Worthington 2019) investigated the roles of various significant life events, finding serious illness or injury, loss of employment, marital breakdown and spousal death to be causes of portfolio rebalancing in ways that can have detrimental effects on long-term wealth accumulation. Cardak and Wilkins (2009) examine the implications of exposure to labour income risk for holdings of risky financial assets (defined as equity holdings).…”