Journal of Investment Strategies
ISSN:
2047-1238 (print)
2047-1246 (online)
Editor-in-chief: Ali Hirsa
Lifecycle investing with the profitable dividend yield strategy: simulations and nonparametric analysis
Need to know
- Previous research shows that a life-cycle investment (LCI) strategy is sub-optimal compared to a lump-sum investment (LSI) strategy that fully invests in the market portfolio right from the start.
- We show that LCI is not doomed if this strategy is applied to stocks with high Sharpe ratios and high geometric mean returns.
- An important class of stocks with these features consists of highly profitable firms that pay high dividend yields (in short, PDY stocks).
- Using simulations and nonparametric tests, we show that LCI with PDY stocks outperform both LCI and LSI implemented on the market portfolio.
Abstract
A common piece of advice given to young investors is that they should invest a high percentage of their wealth in stocks when they are young and progressively switch to bonds as they age. Critics argue that this life-cycle (LC) approach is suboptimal compared with a strategy that is fully invested in a diversified market portfolio. Using simulations, we show that LC investing implemented on highly profitable and high dividend yield stocks (the profitable dividend yield strategy) provides a compelling solution to the suboptimality problem by leveraging on the strategy’s high average return and outstanding Sharpe ratio compared with a market portfolio.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
