In his new book, “The Aspirational Investor: Taming the Markets to Achieve Your Life’s Goals,’’ Ashvin B. Chhabra argues convincingly that the first step in achieving a successful investment strategy is to know thyself.
“I like to call (it) objective-driven investing. It’s a theory that is less about math equations and statistical formulae and more about what you hope to achieve in life,’’ he says.
Chhabra is chief investment officer of Merrill Lynch Wealth Management, Bank of America. His philosophical approach may sound a tad New Agey, but he backs up his thinking with plenty of concrete examples and hard numbers. His book requires careful reading and attention to its numerous tables, graphs and pie charts. But Chhabra’s writing is clear and straightforward, and he bolsters his ideas with a lively overview of the history of investing and finance.
“The singular message of this book is that investing is not about the markets. Investing is about you. Your investment strategy can and must be designed to help you make progress toward the things that matter most. It should not be a blunt instrument of force, whose primary aim is to ‘beat the market,’” Chhabra says.
His plan for helping clients find their inner investor is called the Wealth Allocation Framework. It incorporates economic theories, white papers and personal success stories, among them Harry Markowitz’s (with Jim Tobin) Nobel Prize-winning work on modern portfolio theory (asset allocation and diversification); “Triumph of the Optimists: 101 Years of Global Investment Returns’’ (Elroy Dimson, Paul Marsh, Mike Staunton); Robert Shiller’s “Irrational Exuberance,’’ and the strategies of David Swensen, chief investment officer for Yale University Endowment; and investor Warren Buffett.
To start, the investor should outline goals, consult a financial advisor or financial planner to better understand their cash-flow analysis, assess risk allocation and then implement asset allocation and portfolio diversification.
In “How Much (Money) Do I Need,’’ Chhabra advises the investor to calculate “the Number,’’ the amount of money needed to enjoy retirement, but warns that the “uncertainty of future equity market performance is an especially intractable problem in determining the Number.
“What you need is a framework to achieve your essential goals no matter what the market does. (This) rests on how effectively you identify, prioritize, and quantify your goals and adapt your investment strategy appropriately along the way.’’
Inspired by the humanistic psychology work of Abraham Maslow (“The Hierarchy of Needs’’), Chhabra says the investor should divide his financial needs into the essential (safety and shelter); the important (stability), and the aspirational (appropriately sized dreams and aspirations). From this list, the investor can “quantify the cost of deconstructing each one into a series of cash flows,’’ he says. A key quantifier is that “your investment return matches the rate of inflation.’’
Combining modern portfolio theory (but with more nuance, Chhabra says) with the Prospect Theory (attitude toward risk) of behavioral scientists Daniel Kahneman and Amos Tversky, Chhabra’s Wealth Allocation Framework establishes three risk allocation buckets: safety (cash, home mortgage, safe investments, annuities, etc.); market (equities, fund of funds, fixed income, etc.) and aspirational (“human capital,’’ investment real estate, small business, etc.).