Are you a STOCK or a BOND? Book Cover.

Field Work

Nature of Job is Key to Investing

Toronto finance professor Moshe Milevsky has written a new book, so this seemed like a good excuse to revisit his favorite question: are you a stock or a bond?

Milevsky believes financial advisors should ask their clients this question before making any asset-allocation decisions.  If someone has a risky job, he argues – if they are a stock – then their portfolio should emphasize bonds.

“If a financial advisor says you have a lot of stocks [in your investment portfolio] and should buy bonds, the response should be, ‘My job is a bond,’ “ he said.

Milevsky is adding another layer to the risk formula usually promoted by financial planners, who typically advise clients to lower their risk as they age.  Milevsky wants people to avoid the double jeopardy dramatized by Enron Corp. employees, who had high-risk jobs in energy speculation and put their money into high-risk stocks – even worse, they were Enron stocks.

In a recent interview, he rated a few professions on the stock-bond continuum to demonstrate how his theory works.

As a professor, Milevsky is pure bonds.  He has a secure future – the Schulich School of Business at York University is unlikely to fire him – so he can tolerate putting a high percentage of his financial assets in the volatile stock market.

“The day I got tenure I sold my bonds, and I bought a lot of stocks,” he said.

But one of his graduate students who landed a job as a financial analyst for a major bank is a stock, because his employer, the financial sector, is risky.  “Even though he’s really young and has many years ahead of him,” Milevsky said, “the $1,000 he’s saving a month should be in fixed income.”

Barber?  Hair always grows, so barbers are bonds.

Entrepreneurs and high-tech employees are stocks because their fortunes rise and fall with the economy – and the stock market.  But Milevsky noted that the high-tech employee isn’t just a stock; he’s a Nasdaq stock.  If he does invest in stocks, he should buy energy, consumer, financial, and healthcare stocks – anything but tech.

What about an artist?  The bad news is that a starving artist “doesn’t have much human capital” and very little assurance of making a living, he said.  It’s most important for artists to save money, making the stock-bond issue “irrelevant.”

What about millionaire sculptor Damien Hirst?  His work is popular among Wall Street employees, so he’s a stock.  “In bad times, people don’t spend $100 million on a frozen cow,” Milevsky said, referring to Hirst’s iconic cow preserved in formaldehyde.

The professor doesn’t have a problem with the financial-planner dogma.  Young clients with decades to accumulate savings can ride the stock market’s ups and downs.  He simply proposes that people look at the bigger picture.

An individual’s “human capital” – his or her ability to earn money – becomes increasingly important as the U.S. and Canadian pension systems shift from guaranteed employer pensions to 401(k)s, which require individuals to save and invest for their own retirement, he said.  The average investor has to be more savvy about investing, because the 401(k) is all they have.

Three years ago, Milevsky wrote a book on the topic, Are You a Stock or a Bond? In a new book, he neatly ties this concept into his advice for retirees to invest in secure products, such as annuities, which pay out a guaranteed income no matter how long the retirees live.

This would eliminate all risk – and that, according to Milevsky, is about right for retirees, who have largely depleted their human capital.

His new book, co-authored by Alexandra Macqueen, is Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life.

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