THESIS DEFENSE AND PRESENTATION WEDNESDAY, JUNE 24, 1998

1. THESIS DEFENSE AND PRESENTATIONWEDNESDAY, JUNE 24, 1998 COMMITTEE MEMBERSROBERT WEAGLEYCRAIG ISRAELSENLOREN NIKOLAI

2. INTRODUCTION • The household’s decision to consume less of their current income enables them to satisfy the unit’s goals. • It is the purpose of this research to gather insight on such similarities in asset allocation patterns and to answer the following research questions. • (1)How do economic factors affect the composition of a household’s asset portfolio? • (2)How does life cycle stage, as defined by age, affect the distribution of financial and consumer durable assets, as hypothesized by the life-cycle model of asset allocation?

3. LITERATURE REVIEW • Uhler and Cragg (1971)analyzed how income and nonhuman wealth affect the composition of a family’s asset holdings. Their study examined household portfolios comprised of checking accounts, savings accounts, saving bonds, and stocks. • Claycamp (1963)determined that the percentage of households which possess variable-dollar investments (such as stocks, bonds, owner-occupied home, other real estate, and businesses) increased steadily as their asset level increased. • Weagley and Gannon (1990)studied the portfolio management of individual investors. Their research investigated several assets by dividing them into 4 groups: housing, financial securities, savings, and retirement investments. Utilized 9 independent variables – total assets, total debt, total income, age, age squared, household size, single/dual earner households, and education.

4. PYRAMID OF RISKfor structuring an assets portfolio with respect to risk aversion and expected return. The base of the pyramid is comprised of conservative investments which carry little risk but offer little in way of return. At each successive level the amount of risk rises along with the expected return. The idea is that investors should not progress to the next level of risk until a solid foundation of safer financial investments has been made at each preceding level. LIFE-CYCLE APPROACH – investments move between conservative and speculative according to the households stage in the life-cycle. This allows the portfolio to stay balanced as the family progresses through time. Literature ReviewAsset Management Styles

5. Life Cycle Approach

6. Methodology • Data Source:   1992 Survey of Consumer Finances (SCF) 3906 national respondents 5 imputations 19,530 total observations   Total number of observations utilized 16,440.0 Total number of observations utilized after weighting 15,840.4 • Independent Variables: Total Assets Total Income Total Debt Age

7. Investment Properties Principle Residence Business Property Real Estate Property Depository Accounts Checking Accounts Savings Accounts Money Market Accounts Certificates of Deposit Cash from Brokerage Accounts Government Savings Bonds Other Investments Retirement Accounts Individual Retirement Accounts Pensions Annuities Life Insurance Stocks Corporate Common Stock Stock Funds Bonds Government Bonds State and Municipal Bonds Bond Funds  Methodology – Asset Classifications

8. Results – Total Income • The average dollar worth of household assets tended to increase with the level of total income, however, there was an overall lack of significant change between the 1st 9 deciles. This result denotes that there is not a significant difference in the amounts held in these assets. It should be noted that the change in mean value was consistently significant for households within decile 9 (income of $60,160 - $86,780) to those within decile 10 (incomes over $86,000). • The results which analyze the proportions of total assets held in each asset imply that as the unit’s total income increases the household devotes less of their portfolio to low-risk investments such as checking/savings accounts, as well as vehicle stock. Proportions held in higher risk assets, such as property and stocks, increased; but there was an overall lack of significant change between the adjacent deciles of each.

9. Results – Total Assets • As the asset level increased within the household, so did the mean value of the unit’s investments. In fact, most all of these changes were significant. •  The empirical results support past researchers’ results where households devote a larger percentage of their portfolio to riskier investments the greater their level of wealth. As you can see, the proportions in depository account and vehicle stock decreased whereas the proportion in property increased. The other financial assets fluctuated but had a tendency to decrease significantly after the household reached over $225,180 in assets (decile 8). • Possible reasons being: retirement funds – the household may be self insured stocks/bonds – do not yield as much return as property and not providing enough income (rental income)

10. Results – Total Debt • With regards to total debt, the outcomes were not consistent with previous studies in that a household’s debt was not a driving force in causing the mean values of the units’ assets to fall. In fact, greater debt was sometimes associated with greater stocks of some assets. However, each investment experiences a significant increase in mean value from debt deciles 9 to 10. This implies that at a certain point either • (1)debt is not a factor considered when increasing assets • (2)the accumulation of debt and the increasing mean values are related (ex. to increase the mean value of your vehicle one may purchase a higher valued car which may require an auto loan. •  With regards to the proportions of total assets Depository accounts decreased as total debt increased There may have been a transfer of funds to pay off debt or acquiring new assets

11. Results - Age • Consistent with Siverd (1986) and Weagley and Gannon (1990), the research indicates that households have the tendency to regard life-cycle stage when allocating assets within their portfolio. These life-cycle considerations can be assumed to focus on the individual asset’s specific characteristics and levels of risk.

12. LOW RISK HIGH RISK Stage 1 Build a reserve of safe investments (age decile 1) Stage 2 Invest in riskier securities (age decile 2) Stage 3 Balancing risk with conservative investments (age decile 3) Stage 4 Able to invest in riskier Securities (age decile 4, 5, 6) Stage 5 Invest for income (age decile 7) Stage 6 Conservative mix of investments (age decile 8) Stage 7 Portfolio contains a heavy mix of income-oriented investments to replace lost salary (age decile 9 and 10)

13. Implications for Practitioners Educators and Practitioners: • By utilizing the results of this study, practitioners will be better able to identify customer needs more quickly and efficiently. By no means are the asset management styles discussed a solution for every investment client, but, they will provide guidelines on choosing assets with regards to various economic and age factors. •  Educators/Extension Specialists can provide the public with simple methods by which to manage their assets and answers to complex investment allocation decisions. The life-cycle approach offers the flexibility to cater to both needs while allowing freedom to choose suitable assets. This study is also practical for many different investors from those who need investment advise on speculative investments to buying a vehicle.