By Moshe A. Milevsky, Ph.D.
Reviewed by Gary W. Silverman, CFP®
Gary Silverman owns Personal Money Planning, a fee-only financial planning firm in Wichita Falls, Texas. He is the editor of the financial newsletter, Personal Money Planning, writes the newspaper columns Your Money and Biz2Biz, and hosts the cable talk show, Money Cent$. Contact him at www.personalmoneyplanning.com.
Moshe Milevsky is a finance professor at the Schulich School of Business at York University in Toronto, Canada. He's also the president of a software company catering to the financial services industry called QWeMA (short for Quantitative Wealth Management Analytics).
Two main assumptions form the basis of his book, Your Money Milestones. First, the future is unpredictable ... at least a lot of the terrible things that might happen are (think black swan). Second, the most valuable asset class for most people is themselves.
This second point leads to a balance sheet, simplified here: Financial Capital + Human Capital - Visible Liabilities - Hidden Liabilities = your Holistic Net Worth.
Human Capital, simplified, is a NPV calculation of your future earning stream. Hidden Liabilities are all the bad things that might happen in the future.
Milevsky uses this framework to discuss those nine most important financial decisions from the book's title. The chapter titles clue you in to Milevsky's all-important decision points:
- Is the Long-Term Value of an Education Worth the Short-Term Cost?
- What Is the Point of Saving Money Forever?
- How Much Debt Is Too Much and How Much Is Too Little?
- Are Kids Investments and Can Marriages Diversify?
- Government Tax Authorities: Partner, Adversary, or Bazaar Merchant?
- Can You Eat Your House or Will It Ever Pay Dividends?
- Insurance Salesmen and Warranty Peddlers: Are They Smooth Enough?
- Portfolio Construction: What Asset Class Do You Belong To?
- Retirement: When Is It Time to Shutter the Well and Close the Mine?
The book is well written and very readable. While I don't think any of his points are new to the avid financial reader, they will give most of you something to ponder. Let me give you an example.
If portions of the above balance sheet sound familiar, they should. A few years back, the concept of your human capital as an asset class got some attention. As you know, some asset classes have higher betas than others. Human capital is no different. A teacher tends to keep his job, but is probably a bit underpaid compared to other college graduates. A marketing executive may make quite a salary, but has a greater chance of becoming unemployed. As asset classes, the teacher is low risk, low return; the marketer is higher risk but with higher potential returns.
Milevsky portends you should take your human capital into consideration when choosing investment assets, with the thought to find a less correlated asset. After all, stocks, the economy, and the marketing executive's job are probably all highly correlated. So in her portfolio, a larger amount of bonds and CDs might be in order.
Consider the Ivy League MBA students who are about to invest perhaps hundreds of thousands of dollars into their education for jobs that might not be there when they graduate. Why no jobs? Look what just happened on Wall Street. To balance the risk, a student might consider shorting the market as a hedge against a weakened economy and job market. Theoretical nonsense? Perhaps. But it does make you think.
Your Money Milestones takes a slightly different view on some financial planning issues. If that doesn't scare you away, I'd recommend picking up a copy.
FT Press (2010)