Long-run savings and investment strategy optimization

Area of Science:

• Finance
• Investment Strategy
• Risk Management

Background:

• Classical optimal savings theory assumes constant relative risk aversion.
• Traditional models do not jointly consider investor risk aversion and maximum potential loss.

Purpose of the Study:

• To develop automatic strategies for optimizing lifecycle savings and investment.
• To investigate the impact of jointly considering risk aversion and maximum loss on investment strategies.

Main Methods:

• Developed a new optimal savings strategy based on constant absolute risk aversion.
• Utilized downside risk-adjusted equivalence for performance comparisons.

Main Results:

• An optimal savings strategy emerges when risk aversion and maximum possible loss are considered simultaneously.
• Holding a constant amount in risky assets is optimal for high risk aversion and high maximum loss scenarios.
• The proposed strategy outperforms other simple investment approaches.

Conclusions:

• Joint consideration of risk aversion and maximum loss is crucial for effective lifecycle investment optimization.
• Constant absolute risk aversion provides a more robust framework for savings strategies.
• This approach enhances performance in standard lifetime saving and pension planning.