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Wealth portfolios and elite professional athletes
journal contributionposted on 06.12.2017, 00:00 authored by G Fox, Jason WestJason West, M Drew
Defi ned contribution pension plans typically rely on some type of lifecycleallocation investment strategy. This approach has recently been shown to be sub-optimaldue to the portfolio size effect. The terminal wealth of individuals with steadily increasingearnings over time is signifi cantly less when using a lifecycle strategy compared with asimple contrarian approach. The adverse effect of an inappropriate asset allocationstrategy for investors with unorthodox earnings profi les, such as for professional athletes,can be greatly magnifi ed. We demonstrate that strategies that exploit the portfolio sizeeffect vastly dominates terminal wealth earned using lifecycle strategies for individualswho experience unorthodox earning profi les, particularly those generating high investableincomes early in life. While the lifecycle strategy contains some attractive features relatingto risk aversion and diminishing utility from wealth, we demonstrate that for unorthodoxearnings profi les the case for taking advantage of the portfolio size effect is particularlystrong.