Personal-finance expert Prof. Moshe Milevsky is interviewed in the November issue of the Journal of Financial Planning. A lot of good ideas in the piece. Highlights from Milevskys responses include:
diversification among stocks and bonds not enough; also need to diversify across investment products like variable annuities, mutual funds, managed accounts, ETFs, etc. (e.g. annuities deal with longevity risk — chance of outliving financial assets — while a stock/bond portfolio lets one leave an inheritance)
financial planning today is too focused on financial capital and not enough on human capital e.g. teachers may express low risk tolerance and have a preference for fixed-income securities but their human capital is bond-like so they should take more risk in stocks etc. (conversely, stock brokers should overweight bonds)
investor attitudes to risk are fickle and risk questionnaires cant really capture risk tolerances .I tend to be much more risk averse in the morning before my latte than I am after my latte. You can’t make decisions based on fleeting frames of mind. I think we have to look at things that can’t be impacted by your mood. What’s your job? What’s your annual income?
Retirement planning: A financial adviser should segment a clients needs into two groups: essential and nice-to-have and the essential requirement you absolutely immunize with the safest investments around . So you’re 55 years old. You want to retire in the next 10 to 20 years. Here’s the amount of Social Security you can expect. Here’s the amount of pensions that you may or may not have, and you just found a $27,000 gap. How do we fill that $27,000 gap? You don’t fill it with expectation. You don’t fill it with average [e.g. stocks earn 8% a year]. You don’t fill it with high probability. You fill it with absolute certainty. You make sure that you have enough money today to buy a fixed-income instrument that will generate that for the rest of your life.
See the interview here.