Are You A Stock Or A Bond?

Moshe Milevsky wants you to be smarter about risk. Dr. Milevsky is the Executive Director of the Individual Finance and Insurance Decision (IFID) Centre and is an Associate Professor of Finance at York University in Toronto, Canada. He is the author of three books on investment management and retirement planning. Recently, he penned a short article for The Wall Street Journal on a topic where investing and retirement planning intersect, entitled "How to Think Smarter About Risk".That article is here.


Milevsky believes that too many investors may be taking big chances with their money because they aren't considering the most important asset of all: themselves. And he wonders if a large, sustained drop in the stock market would affect your personal finances. Most people would be devastated by a return to the stock market lows of 2009. But Milevsky thinks you should think more broadly. Most importantly, he believes you should think about how such a drop would affect your paycheck and your career. It depends upon the person:

Earnings in some professions are tightly linked to the stock market—an investment banker, say, or portfolio manager or financial adviser—while others, such as hospital nurses or tenured professors, are relatively immune to these zigs and zags. Most people will fall somewhere in between.

Consider this an exercise in personal risk management. It isn't intended to gauge whether you believe the stock market will test those levels again, and I'm not asking whether you are bullish or bearish. That is not what personal risk management is about, even if it is how most people practice it. The issue here is: If the bear returns for a prolonged visit, regardless of your subjective view of these odds, how would it affect your current and future earning power? And—more important—are you properly considering it when creating your investment portfolio?

Milevsky worries "that one of the problems plaguing both investors and their financial advisers is that asset-allocation decisions are based excessively on how people feel (risk-averse or risk-tolerant) and what they believe (bullish or bearish about the stock market) as opposed to how much risk their personal balance sheets can tolerate.To put it in even more-basic terms: As part of any asset-allocation strategy, you need to determine whether you are a stock, with earnings that can fluctuate wildly with the market, or a bond, with earnings that are less flashy but steady. You will likely find that the overall level of risk you are taking is much higher or lower than you think."

Milevsky goes on to discuss his concept of "a personal beta", your individual balance sheet and the role of insurance in changing some balance sheet items from "stocks into bonds". It's definitely worth a read.