 |
Bogleheads
Investing Advice Inspired by Jack Bogle
|
| View previous topic :: View next topic |
| Author |
Message |
Barry Barnitz
Librarian
Joined: 19 Feb 2007
Posts: 1445
Location: Virginia Beach
|
 Posted: Tue Jul 24, 2007 11:13 pm Post subject: Lifetime Financial Advice: |
 |
|
Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance by Roger G. Ibbotson, Moshe A. Milevsky, Peng Chen, CFA, and Kevin X. Zhu (2007)
| Quote: | | We can generally categorize a person’s life into three financial stages. The first stage is the growing up and getting educated stage. The second stage is the working part of a person’s life, and the final stage is retirement. This monograph focuses on the working and the retirement stages of a person’s life because these are the two stages when an individual is part of the economy and an investor. Even though this monograph is not really about the growing up and getting educated stage, this is a critical stage for everyone. The education and skills that we build over this first stage of our lives not only determine who we are but also provide us with a capacity to earn income or wages for the remainder of our lives. This earning power we call “human capital,” and we define it as the present value of the anticipated earnings over one’s remaining lifetime. The evidence is strong that the amount of education one receives is highly correlated with the present value of earning power. Education can be thought of as an investment in human capital. One focus of this monograph is on how human capital interacts with financial capital. Understanding this interaction helps us to create, manage, protect, bequest, and especially, appropriately consume our financial resources over our lifetimes. In particular, we propose ways to optimally manage our stock, bond, and so on, asset allocations with various types of insurance products. Along the way, we provide models that potentially enable individuals to customize their financial decision making to their own special circumstances. |
_________________
blb
December Birthday Celebration: Ludwig van Beethoven |
|
| Back to top |
|
 |
pkcrafter
Joined: 04 Mar 2007
Posts: 2985
Location: CA
|
| Posted: Wed Jul 25, 2007 12:21 pm Post subject: Thanks |
|
|
Barry,
Thanks for posting this paper. It's long, but easy to read. And there is something in there for both those in accumulation phase and withdrawal phase. From pg 15 -
| Quote: | .... many students of finance might expect to earn a lot more than their university professor during their lifetimes, but their relative incomes
and bonuses will fluctuate from year to year in relation to the performance of the stock market, the industry they work in, and the unpredictable vagaries of their labor market. Their human capital will be almost entirely invested in equity, so early in their working careers, their financial capital should be tilted slightly more toward bonds and other fixed-income products. Of course, when they are young and can tolerate the ups and downs in the market, they should have some exposure to equities. But all else being equal, two individuals who are exactly 35 years old and have exactly the same projected annual income and retirement horizon should not have the same equity portfolio structure if their human capital differs in risk characteristics. Certainly, simplistic rules like “100 minus age should be invested in equities” have no room in a sophisticated, holistic framework of wealth management.
Portfolio allocation recommendations that do not consider the individual’s
human capital are not appropriate for many individual investors who are working and saving for retirement. |
Paul
_________________
 |
|
| Back to top |
|
|
zhiwiller
Joined: 20 Feb 2007
Posts: 1198
Location: New York
|
| Posted: Wed Jul 25, 2007 2:41 pm Post subject: |
|
|
| That was a really interesting read. I wish they would have defined how they derived the risk-aversion variable better though. |
|
| Back to top |
|
|
docneil88
Joined: 30 Apr 2007
Posts: 559
Location: Taxable
|
| Posted: Wed Jul 25, 2007 5:07 pm Post subject: Re: Lifetime Financial Advice: |
|
|
An interesting quote from the Summary & Implications section of
Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance
by Roger G. Ibbotson, Moshe A. Milevsky, Peng Chen, CFA, and Kevin X. Zhu (2007): | Quote: | Human capital is typically a large quantity at the start of a career because it reflects the present value of all the future income that individuals are expected to earn. This human capital is bondlike (i.e., earning a relatively stable, although usually growing, and predictable income stream). Most individuals have little financial capital early in their careers. Any small amount of financial capital should be invested almost entirely in equitylike investments so that the individual's overall asset allocation (human and financial capital) has both an equity and a fixed-income componenent.
|
|
|
| Back to top |
|
|
|
|
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum
|
Powered by phpBB © 2001, 2005 phpBB Group
|
Wiki
FAQ
Search
Memberlist
Usergroups
Register
Profile
Log in to check your private messages
Log in
