Ashvin B. Chhabra's
Aspirational Investor advocates what the author calls "an entirely new
approach to managing wealth," which is based on achieving personal goals
and managing risks rather than relying exclusively on the market. (If you think about the term Modern Portfolio Theory Plus, The Aspirational Investor is the plus.)
To this end, Dr.
Chhabra, who was Chief Investment Officer at Merrill Lynch, proposes a Wealth
Allocation Framework to accommodate three needs: financial security,
maintaining one's standard of living despite inflation and living longer, and
pursuing one's aspirational goals. He also characterizes these as essential
goals (safety and shelter), important goals (being able to support those who
are important to you), and aspirational goals (pursuing your dreams),
respectively.
Naturally, the
approach splits all of one's assets and goals into three buckets based on risk,
where each bucket corresponds to each of the three needs. The safety bucket
contains the lowest risk and lowest return assets, the important goals bucket
contains a diversified market portfolio which should earn market returns, and
the aspirational bucket contains speculative investments, one's business, and
so on, basically anything that has the potential for high returns but can also
go down to zero.
Chhabra provides a
seven step process on how to implement the buckets and how to evaluate the
riskiness of certain assets. How risky something is depends on one's situation
and goals, and different people might have the same asset in different buckets.
Chhabra argues for
converting one's goals into cash flows (how much money you need to save now to
achieve your goals) and provides simple but powerful formulas to calculate
them. In general, the formula is
savings required for
[goal] this year = cost of goal in today's dollars divided by the number of
years you have to achieve the goal
The following year,
you perform the same calculation, except you use that year's dollars and
subtract what you have already saved.
For example, let's
say your goal is to pay for your kid's college, which will be in 18 years and
currently costs $120,000 (four year tuition). Per the formula, the first year
you should save $120,000 / 18 years, or $6,667. The second year, let's say college
costs are $122,000. You reduce the $122,000 by the $6,667 you already saved,
which is $115,333, and divide that by the number of years remaining, which is
17. Per the formula, you would save $6,784 the second year. Proceeding thus for
the 18 years would enable you to save the inflation adjusted amount for the
college tuition.
You should do this
cash flow savings method for all of your goals, which includes retirement.
How you save the
converted cashflows depends upon your goal and where it fits in the risk
allocation framework.
This is quite
powerful, but also daunting, especially for people who are short on savings and
working years.
The Aspirational
Investor seems to be targeted toward higher income earners and people who are
already in the habit of saving. For the latter, Chhabra provides a method that
reduces risk as well as a clearer picture of how much is needed for each goal.
Another category
that would benefit most from the book is young people. I certainly would have
benefited from reading it 15 years ago (not that I could, as it was published
in 2015). Following its simple principles would have made me far better off. If
you're young, read The Aspirational Investor!
Aside from the meat
of the book, Chhabra does a good job of discussing many of our cognitive biases, our inability to predict markets, and how these lead to poor results. He also has two interesting chapters
comparing the famous Yale Endowment investing model and Warren Buffett's
Berkshire Hathaway in terms of the risk allocation framework. These serve as an
illustration of how similar assets belong in different risk buckets for
different institutions (or people).
The short book is
well worth the time it takes to read it, but it's probably more cost effective
to take it out from the library than to buy it.
