Household Investment Variation and Wealth
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Frequent shifting of household portfolio composition may erode wealth due to poor market timing and transaction costs. If household preferences are stable, the optimal wealth maximizing strategy is periodically rebalancing to maintain a relatively constant ratio of investment assets to wealth from year to year. However, some households may fail to rebalance, or may change their preference for broad asset classes because of inexperience or behavioral biases. This research tests the impact of variation in the capital accumulation ratio (CAR), a commonly used ratio of investment assets to net worth, on changes in wealth using quantile regression. Using quantile regression, we find that having a high standard deviation of CAR results in the greatest losses among those with the lowest change in wealth between 1994 and 2004.