Empirical studies on long-term investing

The essence of long-term financial planning has been acknowledged since long, as the old adage says “save for the rainy days”. Financial theory has shown that in addition to savings, investments in risky assets can contribute to realizing certain financial objectives.

Financial objectives typically vary across investors. For instance, an individual investor may have the long-term goal of financing the college education of her children, whereas the main objective of pension funds and insurance companies is to meet their current and future liabilities.

This thesis focuses on investment issues that are typical for long-term investors. Chapters 2 and 3 study the problem of inflation hedging. These two chapters analyze the extent to which US stocks, bonds, T-bills and commodity futures are able to reduce an investment portfolio’s real return variance due to US inflation. These chapters consider investment horizons between 1 month and 10 years. Chapters 4 and 5 take a broader view and do not focus on a specific risk such as inflation. Instead, these chapters analyze the portfolio choice problem of domestic and international long-term emerging market investors, who maximize the expected utility of their real terminal wealth. The emerging market’s asset menu consists of a shortterm money market instrument, a stock index and possibly bonds (Chapter 5). The use of real terminal wealth in the objective function requires immunization against all risk factors that impact on real returns.

In sum, within the broader theme of long-term investments, this thesis consists of four papers. The first two address the issue of inflation hedging for US investors, while the last two deal with the broader multi-period portfolio choice problem of realizing long-term stable real returns for an emerging market investor. The remainder of this introduction provides a brief overview of each individual chapter.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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