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Are You a Stock or a Bond?: Identify Your Own Human Capital for a Secure Financial Future, Updated and Revised Hardcover – Sep 21 2012
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From the Back Cover
Praise for the First Edition of Are You a Stock or a Bond?
“Milevsky offers an original and clear re-thinking of the most fundamental concept in one’s financial lifetime: the management of risk, in all of its not-so-obvious dimensions.”
—Nick Murray, Author, Simple Wealth, Inevitable Wealth
“This book is another example of Milevsky’s ability to make the complex understandable...an excellent primer—for both advisors and their clients alike—on the ‘How Tos’ of effective retirement income planning.”
—Jim Rogers, CFP, 2008 President, The Million Dollar Round Table (MDRT)
“In this new book, the author presents a holistic framework for investors and advisors to think about critical issues that impact investment decisions, such as human capital, mortality risk, and longevity risk. But even more importantly, Milevsky presents practical solutions that we can all follow to achieve financial security throughout our lives. This book is a must read for everyone in the financial services industry.”
—Peng Chen, CFA, Ibbotson Associates
“This is an extremely timely and valuable book. Our financial lives have never been more complex, and the challenges for many are daunting. Milevsky provides a new perspective that can really help people make better financial decisions and attain a greater level of financial security.”
—Matt Greenwald, President, Mathew Greenwald & Associates
“The author has written an instant classic that will help people become better educated retirement customers and also help financial advisors improve their professional skills.”
— Francois Gadenne, Chairman of the Board and Executive Director, Retirement Income Industry Association (RIIA)
“Milevsky delivers one of the best books to date on personal financial planning—a refreshing blend of content, conceptual correctness, and clarity. Buy it. Read it. Do it.”
— Richard M. Ennis, Chairman, Ennis Knupp & Associates; Editor, Financial Analysts Journal
The most valuable asset you’ll ever own is your human capital. Understanding this is the secret to building a more secure financial future, a safer retirement income, and a more rewarding economic life.
In this book, Moshe Milevsky, Ph.D., inspires you to identify and helps you quantify your human capital, take advantage of it, and incorporate it in every financial planning decision you make.
First, you’ll learn how to think about the long-term financial and risk attributes associated with your career path—and balance your financial capital and human capital to maximize overall returns and minimize overall risks. Next, you’ll learn how to integrate investments, insurance, annuities, and retirement plans to generate the safe and reliable income you’ll need.
Fully updated to reflect the newest data in today’s difficult, uncertain markets,
Are You a Stock or a Bond? will help you plan toward generating a lifetime of income that you can’t outlive.
Master smarter, more effective ways to diversify and allocate assets
Diversify and manage risk over space and time, and adopt the new tools of product allocation
Avoid financial blunders millions of people make every year
Invest holistically, for the long term, with clarity and objectivity
Build your own rock-solid personal pension
Give yourself monthly income you can rely on, even if you live to 120
Understand which risks to hold and which to hedge
Make smarter bets about investments, inflation, and your own personal longevity
About the Author
Moshe A. Milevsky, Ph.D., is a professor at the Schulich School of Business and a member of the graduate faculty of the Department of Mathematics and Statistics at York University in Toronto (Canada). He has lectured at the Wharton School of Business at the University of Pennsylvania, the London School of Economics (UK), University of New South Whales (Australia), ORT University in Montevideo (Uruguay), University of Cyprus, University of Leuven (Belgium), and Goethe University (Germany).
He is a 2002 Fellow of the Fields Institute for Research in Mathematical Sciences. In 2003 he received two National Magazine (Canada) awards for his popular writing on personal finance. In 2006 he received a Graham and Dodd scroll award from the CFA Institute for an article in the Financial Analysts Journal . In 2008, he was honored with a lifetime achievement award from the Retirement Income Industry Association, and in 2009 he was selected as an MDRT Main Platform speaker.
Prof. Milevsky has published ten books, more than 60 peer reviewed research papers, and more than 200 popular magazine and newspaper articles. He currently lives in Toronto, but grew up in Baltimore, New York, Mexico City, and Jerusalem. He is married with four daughters. Follow him on Twitter at http://twitter.com/RetirementQuant.
Inside This Book(Learn More)
Top Customer Reviews
These were the exact same words, in verbatim, that our macro economics professor said to our class in 1990. He went on to say that the difference between what your live can be and what everyone else around is… is your ability to learn and constantly invest in your own education. Because, as he explained, things change at companies, investments go and down but your ability to adapt to changes in the business environment.
ARE YOU A STOCK OR A BOND with the subtitle “Identify Your Own Human Capital For A Secure Financial Future” is NOT about what the title insinuates which is what my professor had said some two decades ago: identifying, perfecting (through upgrading skills/education) and by utilization (practice makes perfect).
This book is a conversation, a thorough erudite discussion on various investment plans—stocks, bonds, EFT’s, retirement plans— what they are, how they work and the risks involved with each venture.
- Do you think like John Maynard Keynes or Peter Lynch?
- How do pensions works? What is a Defined Benefit (“DB”) Penion plan and how does it differ from a Defined Contribution (“DC”) plan?
- Do you accept an annuity as a lump sum, period payouts or do you remit the sum as a Guaranteed Minimum Death Benefit to a beneficiary?
From there he poses the question, after analysis, of where one might want to invest in or stay away from based solely upon one’s perception of themselves. This is a bit different, in my opinion, than what the title was proclaiming.
This is not to say that I don’t like the book. In fact, I do.Read more ›
This book will interest people who are responsible for their own retirement; those without defined benefit pension plans,
It describes the problems these people face and the uncertainties that make retirement planning difficult: how long will they live, what kinds of returns will they earn (and in what order); how will inflation affect them?
There are a lot of words about what might happen and fancy ways of simulating future events. Unfortunately there is little certainty,
The book mentions some very sophisticated products with which a person can hedge against some risks. I hope that these will be better known and more available as time goes on. They are little mentioned in financial planning materials aimed at consumers.
This book is a good entry point into the author's often much more mathematically challenging work.
Most Helpful Customer Reviews on Amazon.com (beta)
Let's work through one of his examples regarding the finances of a college professor (pg. 96 - 99). The professor makes $100,000 a year. He translates this yearly wage into a PV worth several million dollars of a very safe bond portfolio on the professor's asset side of the balance sheet. However, this is an absurd value giving the professor illusion of riches he does not have. It ignores the professor's income taxes, mortgages, property tax, living expenses for his family, etc... If the author wanted to figure out the PV of the professor's earnings stream he should have focused on the professor's yearly net savings after all expenses are paid and not his entire wage before taxes.
Given that the author has estimated that the professor has the equivalent of several million dollars in liquid assets he does not have; the author goes on recommending a dangerous investment strategy. It entails leveraging the professor's existing $250,000 investment portfolio to $700,000 by borrowing $450,000; and investing the entire $700,000 in the stock market!
That the author can make such a recommendation after the stock market just blew up twice in the past decade is mind-boggling. A 35% drop in the stock market would entirely wipe out the professor's leveraged stock portfolio. The S&P 500 dropped by 48% between March 2000 and September 2002. It also dropped by 56% between October 2007 and March 2009. Also, borrowing $450,000 at let's say 3% will cost the professor $13,500. This recommendation not only wipes out the professor's investment portfolio, but his yearly savings too. It could cause him to default on his mortgage and incur a foreclosure.
Given that the author's core framework is so dangerously flawed, any other criticism will be trivial in comparison. Nevertheless, the author is on soft ground in other areas.
On page 67, he recommends that individuals reconstruct region by region an international stock portfolio instead of investing directly in a diversified international fund. This is to seek higher returns and lower fees. The opposite is more likely because the investor will need to rebalance his international exposure often. That will result in extra transaction costs and taxes.
The author's concept of time diversification (solely holding positions for the long term) is primitive. True time diversification entails disaggregating your portfolio in several buckets with different term horizon (one for emergency/liquidity, one for college savings, another for retirement).
His recommendations on asset diversification are often meaningless 20/20 hindsight. On page 81, he indicates that someone diversified equally across stocks, gold, and US Dollar currency would have weathered the recent financial crisis. The fact that this portfolio held up well in one single set of circumstances does not mean it is a viable long term strategy as 2/3d of the portfolio would earn no economic return but simply represent speculative positions.
He acknowledges the staggering cost of nursing home (pg. 109), but only mentions in a single sentence the need for long term care insurance hundred pages later with no further explanation.
On the positive side, the author shares a few interesting calculations. On page 84, he shows a simple calculation that allows you to convert average return into geometric return (same as IRR). The IRR calculation is: Average return - 0.5(Standard deviation)^2. I tested it, and it works. Throughout the book, the author comes up with interesting calculations I have not seen elsewhere.
The author talks at length about life insurance. His section on how much life insurance you need (pg 45-47) is the best part of the book. However, even within the insurance sections there are contradictions. Regarding the nature of term insurance, he states on page 48: "your monthly premiums are guaranteed for the term of the insurance" only to contradict himself on page 50: "With term insurance, your premiums increase each year."
Regarding post-retirement disinvesting he is big on annuity products (chapter 10). His very conservative recommendation to annuitize the majority of your retirement funds contrasts with his unbearably risky investment recommendation prior to retirement (the college professor bit). His asset annuitization certainly has merit. But, it is overdone. On page 174, 175, the author salivates at the 6.8% yield the annuities provide as shown in Table 9.3. However, those annuities are a lot less attractive when you consider a 65 year old would have to live till 86 to simply recover his initial premium adjusted for inflation. Thus, transferring lifespan risk to an insurer will most probably cost you. Additionally, the level of annuitization the author recommends pretty much wipes out your estate (pg. 199). When you factor Social Security that is a superior annuity rising with inflation, the level of annuitization needed may be less than the author recommends.
Overall, this is a poor book on financial planning. As a far superior alternative I recommend: The Random Walk Guide To Investing.
The general premise of the book is that people do not take a holistic approach to their financial lives. You own a house in a town with a big employer with much of your retirement portfolio in company stock. The employer cuts back - suddenly your house is worthless, you have no job, and your 401k value drops. How much will this hurt you? It depends on your store of human capital, a fancy way of asking if you are young and can recover, or older and cannot. The house, stock portfolio, and job were not sufficiently diversified.
Or do you spend $100,000 to get a masters degree in a field that nets you a $30k/year job, and wonder why you can't pay off your student loans? It's because you didn't view education as an investment with a required rate of return.
Do you understand the importance of life insurance? Are you being scammed into buying a whole life product, or are you buying too much or too little life insurance without considering the real purpose?
Milevsky goes through all of the financial decisions we make in our life from the perspective of both diversification and risk, noting that a house is considered a poor asset (it is illiquid) and that people underestimate the value of their human capital, or the value of the work they will do in the future. Deciding your appetite for risk will determine your type of employment and how you invest your money.
All of that being said, Milevsky's book reads just like his preface indicates - a book written before the crash with some minor edits afterwards. For instance, Milevsky differentiates between different types of debt. High rate credit card debt, bad. Subsidized home mortgage debt, good! Take that low interest debt and invest it in the market! Even before 2008, financial gurus like Dave Ramsey preached in the Total Money Makeover - that debt was not a tool for most people to use. Your goal in a balanced financial plan should include getting that house and the student loans paid off, despite their low interest rates. As people saw their house values plummet, their stock portfolios contract, but their mortgages staying unpaid, Milevsky's plan to leverage home debt into the stock market likely didn't seem so good.
He even discusses diversifying a portfolio of stocks by buying gold and investing in the dollar. This is great hindsight investing, but does have 30% of a portfolio in gold make sense going forward to anybody? Even those who believe in some diversification with gold likely wouldn't advocate it at 30%! Milevsky discusses international investing, advising building your own international portfolio instead of buying a mutual fund. This is folly for anybody who doesn't sit full-time monitoring their portfolio. Just buy a mutual fund and be done with it!
There are so many important issues discussed in this book that I have trouble giving it just 3 stars. But Milevsky states in his own preface that he has changed his mind on much of what is in the book, but decided to republish it anyways with a few minor changes. This is irresponsibility in the extreme. I recommend you read it because it will make your mind think of issues you may not have considered before, but round it out with some more modern books on proper financial planning.
1. Plain language - the author is a rare breed - he is able to take complex information and turn it into reader friendly text. No small feat especially when it comes to investment information.
2. Assumes little to nothing - while much of this information was fairly basic, I actually like the fact that it assumes nothing of the reader. This allows someone who is a complete novice to benefit as well as a more advanced reader.
3. Tackles different scenario's - one of the major positives of the book was that it tackles different scenarios both in the type of investor as well as type of investment. Initially I thought the "are you a bond or stock" was a bit gimmicky but after reviewing the book, it's a nice easy way to introduce the concept in a way that will stick with the reader.
4. Lots of examples, charts and resources - this is a personal pet peeve of mine but so many authors have their own agenda, program or etc that they forget to provide resources. Not so here. Packed full of information, charts, examples, articles and links to more resources.
5. Good ideas. The author does a good job explaining the need for diversification not just in stocks or bonds but also between job/investment, geography etc... Managing risk...the real risk of both over and under-investing, the real deal on annuitites...that was an especially interesting topic as I actually opted NOT to buy an annuity about 10 years ago for many of the reason cited. Today I actually wish I had locked in some of those rates but at least now, I have a much better understanding of what was going on with the fees etc...
This is the type of book nearly everyone will learn something from; written in a clear, concise and reader friendly manner. Now, I do NOT believe in taking anything at face value and as a college instructor, would be 99.9% unlikely to take some of this advice/suggestions to heart. On the other hand, the author does show the "possibility" of using leverage and other more "risky" strategies to perhaps increase overall returns. Personally, I tend to view the suggestions as mere possible alternatives to increase my own awareness for any given situation. Taken as that, along with the provided tools and resources, it presents several new ideas.
This author covers a broad range of topics that give guidance for a lifetime, but with such a broad knowledge base being laid out, it doesn't fail to have depth on some subjects as well. But the cool thing is I actually learned quite a few things. And that's because the author will give a layman's description without being condescending (which is a rare ability for an investor - perhaps this author has it because he is really a professor). He also uses a lot of math and statistics as explanation, which appeals greatly to my math-minded nerdy side.
His "spin" is what he calls "human capital", which is what your lifetime of working is worth, and how to apply that to your portfolio. This is something that makes perfect sense and I think I already had some sense of it in my investing, but it's interesting to have it spelled out in various scenarios throughout one's life. It's pretty cool to have some reinforcement for what you thought was a good idea, but also great when you have a new outlook on things.
I think this is a great book - nothing too wild, but easy to read and legitimately fresh for what cannot help being some fairly dry material.
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