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.
The Impact of Major Life Events on Australian Household Financial Decision-Making and Portfolio Rebalancing