Scott and Watson (2011) recently introduced a simple "Floor-Leverage" rule for investment if households want to ensure non-decreasing consumption from one year to the next. We show that the leverage in their risky-asset investment policy implies a positive probability of lower consumption than in the previous year. However, for realistically calibrated asset returns, insurance against such bankruptcy risk using put options (at the Black-Scholes prices) is inexpensive and can make the Floor-Leverage rule work. A comparison with standard life-cycle models of consumption and investment shows that the requirement of non-decreasing consumption is very costly in welfare terms, because it results in low early consumption and high consumption growth and works against the desire of households to smooth consumption over time.
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