Bogleheads

[Verde]

Moshe Milevsky's research on retirement funding has often been discussed on this forum. Here is a link to an article concerning his personal portfolio. I guess Bogleheads will find it way too aggressive.

http://www.financialpost.com/s....mp;k=25580

[at]

That sounds like pure madness.

[bob u.]

I politely disagree with the notion of madness. What he's done is consistent with the following link. http://www.ifid.ca/pdf_newslet....003NOV.pdf

As a tenured 39-year old professor, with a well-established administrative position at a strong Canadian university, as well as a gentleman who collects sizeable speaking fees, I'd say Milevksy is a "bond" with a vengeance (to use the terminology from the link I provided).

Besides, Milevsky comes from a distinguished diplomatic family that likely has resources that will, at least in part, find their way to him.

My opinion: he's one very smart dude who is sitting in the catbird seat. Bob U.

[larryswedroe]

Milevsky makes a very important point that most investors and many advisors miss--there is an important asset that is not on your balance sheet if you are in the labor force and that is your human capital. And it should be considered when you decide on your AA

What should be considered is its size relative to your financial assets (very high for young people typically and the reverse for older people) and also its correlation to the economic cycle risk of stocks (and value and small).

A tenured professor's labor capital is likely to be very bond like, while others might have labor capital that is more stock like (say an automobile or construction worker or a small business owner).

Also note how Milevsky considers debt as negative fixed income--something many also forget to do

[pkcrafter]

I have heard Milevsky's ideas before, but I still have trouble accepting them to the extent he does. While perhaps he can hold all QQQQ in his portfolio, from the point of all that is holy in portfolio construction, it's nothing less than ridiculous. Guess I'm not gettin' an A in his class.

Paul
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[market timer]

[ajbibi]

larry,

I made just that point in a posting some months ago. In fact, I am surprised that financial planners do not take human capital more systematically into account when discussing portfolios. I for one wish there were even a crude program that would help me make this sort of adjustment.

It would seem that almost any 30 year old tenured professor with good upside prospects and limited financial assets would be well advised to go 100% equities and to take a large mortgage (for easy and cheap leverage).

Conversely, a high flying trader or movie actor with volatile income streams should probably overweight bonds/cash heavily at any age.

[House Blend]

[larryswedroe]

ajbibi
However, the stability of the labor capital and its correlation to other assets is only one issue

You have other issues like willingness to take risk and need to take risk/

Have to consider all of these issues

As to the issue about advisors--not all are created equal. The Vanguard financial planners from what I have read here never take this into account, nor even the need to take risk. Sometimes with advisors like anything else you get what you pay for and sometimes you pay for what you get (because while good advice doesn't have to be expensive, bad advice almost always costs you dearly no matter how little you pay for it)

[alec]

[nisiprius]

I wonder what Zvi Bodie's personal portfolio is like? (He's the BU professor who coauthored "Worry-Free Investing," which advocates very conservative investing and heavy reliance on TIPS"). Might make an interesting comparison.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[ajbibi]

larry,

I understand your point. But then the problem of financial advice becomes too tautological. If we can rationalize any portfolio choice by "the need to take risk/safety" it makes suggestions about AA nearly meaningless. I am often surprised by the wrangling over a 70/30 vs 30/70 AA or slice and dice, when the risks for most people with at least 10-15 years to retirement from human capital loss or unemployment or divorce swamp the trivial shifts from AA. This is also why I disagree with those who disregard home equity as part of the portfolio. Home equity does behave differently from stocks or bonds, but it is an important asset. Unfortunately, the only papers I've seen in finance generally have done a very crude job of modelling AA in the presence of mortgages, let alone human capital.

I also don't know how I would evaluate a financial adviser before the fact to judge whether he would provide good value for money. At least with AA, one can point (a la DFA) to academic research about index funds and efficient frontiers, and any advisor who deviates strongly from this is suspect. But re: human capital, how do I know that the advisor would use better rules of thumb than I could construct myself?

[bob u.]

Well, I can't possibly keep up with House Blend's wonderful generalizations about faculty. House Blend must have been on the faculty of a bizillion universities with multiple degrees (hopefully, not merely honorary).

But here's the most recent study of TIAA-CREF participant behavior, which I would characterize as "sensible." http://www.tiaa-crefinstitute.....ocs/80.pdf

Somehow, I just can't get my arms around "conservative" and "liberal." I'll leave that to wiser minds. Bob Uphaus, Professor Emeritus, Michigan State University

P.S. House Blend is one of my favorite coffees--easy on the digestive track.

edit: Do look at Figure 1--allocations by age. I'm sure Mr. Bogle would heartily endorse such sensible planning.

[alec]

[Adrian Nenu]

[livesoft]

Though Milevsky has 100% QQQQ in his RRSP, there is no information what percent of his total invested assets that is. His QQQQ holdings easily could be less than 5% of his investments.

[timid investor]

Am I supposed to be stunned by his supposedly agressive allocation?

gee it pales in comparison to mine.



If you really want to hear of ridiculous risk assumptions. peruse the elite trader website forum.

[james22]

[Verde]

Larryswedroe wrote:

[bob u.]

Here's a brief bio of Moshe Milevsky. http://www.nationwidespeakers.....strategist

Frankly, I would not presume to offer Mr. Milevsky any financial advice.

On the other hand, I have read his work carefully over the years and he's been absolutely golden from my point of view. Bob U.

[Adrian Nenu]

Someone ought to send him "Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics "

Adrian
anenu@tampabay.rr.com

[larryswedroe]

"I don't get this "willingness to take risk" argument. Surely its subjective. Is it not the advisor's job to objectively evaluate a client's risk capacity? If the client’s need for risk exceeds his capacity his investment management knowledge should be improved to balance his ability to take on risk with the need.
The main driver of willingness to take risk must be the investor’s level of knowledge of investment theory. (This cuts both ways: some ignorant investors are willing to take on too much risk and some too little). Only once investors with identical circumstances are fully informed can one give credence to any difference in their willingness to take risk."

First, yes it is totally subjective. It depends on the level of "stomach acid" one can take when the inevitable bear markets occur and you will still be able to
a) sleep well and enjoy your life
b) not panic and sell and abandon your well-thought-out plan
AND
c) rebalance
All three are required.

My books give a table based on the historical results in the post war era. Of course that doesnt mean the market cannot repeat the Great Depression era so one needs to consider that possiblility as well.

Second, yes that is one of the most important roles of an advisor. And for those DYIers it is their role. The problems I have found are;
a) that people on average greatly overestimate their ability to deal with
bear markets
b)they treat the unlikely in their minds (severe bear market) as impossible and the likely (rising markets) almost as if it is certain. Thus when the risks do show up they can't stand the heat and panic. So a good advisor really drills a prospective client about this, not just asking them to fill out some form or questionnaire. They go over financial history and show them how a portfolio they have decided on has performed in the past and how bad the losses were, and asked could they have really handled those type losses and still rebalanced and stayed disciplined.

Third, I show three tables in my books and yes sometimes there are conflicts like high need to take risk but low willingness, or vice versa. That is when a good advisor can really add value by showing the pros and cons of each alternative strategy, making sure the investors understands the risks and benefits of each. And helps offers suggestions. But ultimately the choice is the investor's as they will have to live with it.

Fourth, I very much disagree about your statement about the main driver of willingness to take risk being knowledge of history. Yes that should play a key role (though most don't know their financial history) but it is the stomach that matters far more than the head IMO.

[House Blend]

[Adrian Nenu]

Me: Hello, I'd like to get an advance on my human capital. About $250k ought to do it in order to rebalance my portfolio. Tell you what, better make it $300k.

Human Resources: Excuse me sir?

Me: Look, my equity portfolio is down about $250k from the recent market downturn and since I don't have enough in bonds to rebalance, I need the $250k advance from my human capital account.

HR: Sir, we do not do loans here. You might want to try your bank.

Me: Yeah but the human capital account is part of my investment portfolio. You mean I cannot get to it?

HR: Sir, I have no idea what human capital account you are talking about. Please contact your bank if you need a loan. Click.

Me: How about that: my human capital is part of my portfolio yet I can't get my hands on it to rebalance and reinvest.

Adrian
anenu@tampabay.rr.com

[ajbibi]

There are exceptions: Banks do give spectacularly large loans to impecunious students admitted to medical school.

[Valuethinker]

[Valuethinker]

[pkcrafter]

market timer wrote:
The article says he holds other positions, such as VTI and emerging markets, in different accounts.

Thanks, you are correct. And it appears that his retirement account is considerably less than his taxable account. But I still don't agree with putting as much emphasis on human capital as Milevsky does. He's too far over the top to be of much help to the average individual investor. As for advisors recommending such things, can you imagine what damage most advisors would do with something like this?

Adrian: How about that: my human capital is part of my portfolio yet I can't get my hands on it to rebalance and reinvest.

Exactly. Human capital is defined as the present value of future earnings. I would say it's the potential value of future earnings. Putting too much emphasis on something as esoteric as human capital does nothing for the vast majority of investors. One fact that is well known is that a very large majority of average investors cannot tolerate excessively high equity AA, nor can they tolerate portfolios that are have extreme tracking error.

Milevsky is a tenured professor with a guaranteed pension. How many people are in that position? It's one thing to argue these ideas and quite another to recommend them to inexperienced investors. Maybe I'm the irrational one, but I don't go around identifying people as a bond or a stock.

Paul
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[Adrian Nenu]

I think I understand Milevsky's reasoning: his family is wealthy and he has job security and stands to collect a decent pension therefore he has the willingness and ability (but not the need) to take on 100% equity risk. If risk shows up and his portfolio loses say 75% of its value as the NASDAQ 100 index did in 2000-2002, he is still in good financial shape. For a guy who understands risk so well, he is remarkably greedy. One thing puzzles me: per French/Fama, Milevsky should have value tilted to try to maximize return but chose to growth tilt and have lower expected return and more bubble exposure. Strange.

Adrian
anenu@tampabay.rr.com

[bob u.]

House Blend--

Touche! (missing accent). Bob U.

[Verde]

[amateurinvestor]

"Besides, Milevsky comes from a distinguished diplomatic family that likely has resources that will, at least in part, find their way to him."

"I think I understand Milevsky's reasoning: his family is wealthy..."

On what facts are you basing these statements?

[at]

I wonder how our finance prof is doing right now?

He has $1 of personal debt for every $1 of personal equity, which is completely allocated to the stock market and he likes QQQQ and EM. I bet he has been entertaining lots of margin calls. It's a very good thing he's tenured or else...

So much so to the concept of considering your human capital as part of your portfolio. Good riddance.

[Adrian Nenu]

[YDNAL]

[nisiprius]

There are two problems with the "you are a bond" theory. First, you're not "a bond" because as Adrian eloquently pointed out, your human capital isn't liquid. You are at best "an annuity!"

Second, even the most secure jobs, if they are bonds at all, are junk bonds. Google News: "layoffs of tenured professors at the San Francisco Art Institute;" "Of those universities where appropriations have decreased by 10 percent or more, 21 percent have laid off tenured or tenure-track faculty, the survey says;" "Big national law firms are letting partners go... The same is true for tenured teachers and professors, high-ranking accountants at top-tier firms and white-collar corporate managers."

But, and perhaps some accounting maven can help here, I don't think jobs are bonds at all. That is, future not-yet-earned salary is not a debt that a company, or a university, is bound to. Your diamond ring is not an investment, the "bank of Exxon" is not a bank, and your job is not a bond.

[Lbill]

According to Milevsky, human capital is the "discounted value of all the salary, wages, and income you will earn over the course of your working life." Jobs are not bonds, it is the job-holder whose human capital is more-or-less "bond-like" depending on the predictability of his/her future salary, wages, and income. If he/she is a professional with an advanced degree then future earnings and income are more predictable than it is for a bank robber. If he/she is younger then the value of human capital is higher than when older. If he/she is a chip designer for Intel and is likely to find future employment only in similar technology companies, then one's human capital is more "equity-like" because future earnings are linked to the financial and economic fate of technology companies. So, education and training + age + employer are three of the factors that need to be considered in determining how "bond-like" one's human capital might be. I'd say Milevsky is quite "bond-like," in that he is young, highly educated, has diverse sources of income, has future income linked to employment and income opportunities (university, writing, speaking, professional consulting) that are not highly economically sensitive, so I would advise this individual to invest heavily in equities. I would put a 60-year old bank robber with a third-grade education and an IQ of 80 at the other end of the spectrum and advise this individual to not invest anything in equities, but rather to place the proceed of his bank-robbing endeavors into TIPS.
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I can tolerate risk -- it's losing money that bothers me.

[YDNAL]

[johnjtaylorus]

Re humans qua bonds (as Browning didn't say), "A man's reach should exceed his grasp or what's a metaphor?"

[nisiprius]

[Lbill]

The future value of all assets - be they financial or otherwise - is uncertain and difficult to predict. If certainty were the defining criterion, I guess we wouldn't be able to make any investment decisions. I believe that Milevsky (and others) are simply trying to widen our investment perspective to encompass all sorts of different "economic resources;" including financial assets, our claims on government benefits, pension benefits, property, business equity, and earnings capacity. It is really all about diversification of our "portfolio" of economic resources. Of course, you don't have access today to all your future non-financial income flows. But, whatever they are, they are probably unlikely to be highly correlated with the returns from many of your other economic resources. You can, of course, choose to fix the value of your human capital at zero (ie. exclude it entirely from your resource allocation plan) because you believe it is an economic "unknown". That does seem unduly conservative. You want to tilt more heavily toward stocks when you are young not because stocks are "safer in the long run" (which they aren't) but because you have a lot of bond-like human capital that provides diversification.
_________________
I can tolerate risk -- it's losing money that bothers me.

[Adrian Nenu]

[alec]

[Lbill]

I only report what is said by people I think are smarter than I am - which is a pretty large group. This thread prompted me to re-skim Milevsky's book "Are You a Stock or a Bond?" A relevant section is pp. 56-57. He says:

[Tonen]

[Lbill]

A problem with Adrian's example is that an individual who had $300K in his 401K to lose in the stock market would either be (1) making quite a good salary, or (2) much further along in his career and the accumulation of retirement investments. If he's making quite a good salary, then his earnings should be able to replenish his financial portfolio in a relatively short time - heck since the "crash" he's gotten half of it back already plus whatever he's been putting in. If he was further along in his career, a realistic assessment of the value of his expected future earnings should have led him to re-allocate his 401K more conservatively. So, if he'd read the memo, he wouldn't have lost $300K in the first place. He was just a fool.
_________________
I can tolerate risk -- it's losing money that bothers me.

[at]

[at]

[Adrian Nenu]

[stratton]