Health Risk and Portfolio Choice

Ryan D. Edwards, Stanford University

This paper investigates how health, a nontradeable risky asset, can affect the portfolio choices of older investors. A theoretical model is proposed in which individuals are initially endowed with health but face the risk of purchasing health when sick. The model's chief prediction, that health risk prompts individuals to invest more cautiously, is tested with data from the HRS/AHEAD. Findings indicate that health risk is a significant factor in portfolio choice that explains some of the variation attributed to age. A one standard deviation increase in health risk is associated with a 5-25 percentage point decline in the risky portfolio share.