Lifetime Financial Advice
Much of financial planning fails to account for the investor’s human capital, and how that interacts with financial capital. Ibbotson et. al. address the issue in depth in a recent CFA Institute Monograph, Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance
Human capital, in the context of the monograph, is simply the present value of a person’s future earnings. When the investor is young, human capital likely far exceeds financial capital. As retirement approaches, financial capital needs to be able to replace the income as human capital dwindles.
The monograph contains a variety of models and case studies, but some of the important considerations include:
- Security selection should include assets with low correlation to the investor’s income. Too many people, for example, invest too much of their human and financial capital in their employer.
- Insurance products to protect against premature death (life insurance) and unexpected longevity (annuities) must be a part of the overall plan.
- The types of plan in which the investor participates must be considered to develop the optimal mix of lifetime income and bequeath.
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
