Portfolio choice over the life cycle: A sector allocation approach

In a changing pension landscape, asset accumulation and allocation over the life-cycle are increasingly important topics. In this thesis, I refine the basic life-cycle model of portfolio choice by determining the allocation to one of the core asset classes, equity, along sector lines. Using a wide range of sectors, I show that the total allocation to equity is much higher at all ages in a sector allocation model than in a standard specification in which the equity component only consists of a broad stock market index. I find that this is mostly due to better diversification in the sector model. Also differences in correlation between the various equity sectors and labor income growth affect the optimal sector allocations but this hedging effect is small. The higher allocation to equity in the sector model leads to a much higher expected return on financial wealth. As a consequence, both consumption per unit of labor income and wealth per unit of labor income are much higher in the sector model than in the market index model specification.