Abstract
Using pooled cross-sectional data from the Surveys of Consumer Finances, and new panel data from TIAA-CREF, we examine the empirical relationship between age and portfolio choice, focusing on the observed relationship between age and the fraction of wealth held in the stock market. We illustrate and discuss the importance of the well-known identification problem that prevents unrestricted estimation of age, time and cohort effects in longitudinal data. We also document three important features of household portfolio behavior: significant non-stockownership, wide-ranging heterogeneity in allocation choices, and the infrequency of active portfolio allocation changes. Based on a specification including age effects and time effects (excluding cohort effects) we find that equity ownership has a hump-shape pattern with age, while equity shares conditional on ownership are nearly constant across age groups. Based on a specification that includes age effects and cohort effects (excluding time effects), we find that equity portfolio shares increase strongly with age. Following the same individuals over time, we find that almost half of the sample members made no active changes to their portfolio allocations over our nine-year sample period, while the vast majority of those who did make changes increased their allocations to equity as they aged.