The Leverage Lifecycle Strategy: A performance review

Asmund Belcaid

Student thesis: Master thesis

Abstract

Proper savings and investing for retirement matters vitally for retiring safe and pleasant. This thesis challenges conventional investment strategies for retirement savings, by modelling a strategy that employs leverage while being young, in order to reduce risk later. The leverage lifecycle strategy is devised by Ayres and Nalebuff (2010a), and currently only little research exists. This thesis presents an extended version, because it allows asset diversification by including 8 different asset classes (but uses 7). The results are based on 200 cohorts from Monte Carlo simulations. The portfolio initially contains 200% risky assets, and deleverages continuously until the investor has 49% left. The leverage lifecycle strategy outperforms with 5.23% in certainty equivalent compared to a strategy that invests the same percentage amount of risky assets for an investor (with CRRA=23). Also, the leverage lifecycle strategy needs 9.16% less investments in risky assets to obtain the same mean of final wealth. Similarly, the investor can retire 24 months earlier when applying the leverage lifecycle strategy. It does, however, produce a larger uncertainty of the outcome of final wealth. The thesis also examines the resilience of the leverage lifecycle strategy by altering various input variables, which indicates that decreasing the amount of risky investments continuously improves an investor’s final wealth.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages85