Life Cycle Investing

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Life Cycle Investing

• Valuation of a Persons Life
• Tangible assets and Intangible Assets
• Lifetime and Afterlife
• Optimal Portfolio versus Lifetime Portfolio

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Three Basic Concepts in Finance

• Time value of money
• - Present value and future value
• - Compounding growth
• - Opportunity cost

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Three Basic Concepts in Finance

• Risk and Return
• - Definition of risk
• - Absolute versus relative returns
• - Choosing among risky alternatives

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Three Basic Concepts in Finance

• Optimal utility
• - Local optimality
• - Diminishing marginal utility
• - St. Petersburg Paradox

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Investment Goal

• Safety and Happiness
• Financial Independence
• Cash-inflow assets versus cash-outflow
  liabilities
• Income from working and income from investment
• The fluctuation in salary, cash dividends, and
  capital gains
• Manage assets and liabilities Cash match
  approach
• Right now, lifetime and afterlife

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THINK

• Pascal Wager
• - To be or not to be
• Dalai Lamas advice on dying and living a better
  life
• Eventually everybody will die
• The final date is uncertain
• What could benefit a person who are dying

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An Investment Policy Statement

• Outline expectations and responsibility
• Identify objectives and constraints
• Outline eligible asset classes
• - Risky assets and portfolio insurance
• Provide a mechanism for evaluation
• - Benchmark selection

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An Investment Policy Statement

• Questions to be answered
• - What is the real risk of an adverse outcome?
• - What is the probable emotional reaction of the
  client to an adverse outcome?
• - Are any legal restrictions imposed on the
  policy?

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Important Life Events

• Marriage
• Child birth
• House purchases
• Child education
• Lifetime education
• Retirement
• Healthcare
• Philanthropy
• Death

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Long-Term Investment

• Magic of compounding rates of returns
• Principles, cash dividends and reinvestment
• Past 40-year performance
• - Bond (1 to 10.3 at 6 annually)
• - Stock (1 to 45 at 10 annually),
• - Buffetts Berkshire (1 to 7,523 at 25
  annually)
• - Sutter Hill (1 to 163,473 at 35 annually)

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Markowitzs Portfolio Selection

• Relationship between return and risk
• - Optimal market portfolio consisting of
  various types of assets
• - Correlation among various types of assets
• Investment target
• - The highest return for a given risk or
• - The lowest risk for a given return
• Constraints
• - Budget constraint (borrowing)
• - Risky assets and risk-free assets

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Rationality Maxim

• Investment for lifetime consumption
• Utility maximization
• - Risk loving, risk neutral, and risk averse
• Arbitrage Approach
• - Inefficiency to efficiency
• Bounded rationality
• - Satisfying heuristics
• - Evolving and adapting (trial, error, natural
  selection
• - Emotional capital (the regret of omission
  versus the regret of commission)

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Anchors Lifetime Portfolio

• Markowitzs portfolio
• - Optimal market portfolio on return and risk
• Anchors portfolio
• - Relationship between happiness and pain
• - Maximize happiness or minimize pain
• - Optimal lifetime portfolio consisting of
  lifetime events within and after life
• How to measure happiness and pain?
• How to define lifetime events?
• Whats the constraints?
• Percentage of risky assets equal to (100- Age)1

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Intrinsic Value of Lifetime Events

• Happiness, Pain, and Opportunity Cost
• Marriage vs Single
• Child vs No child
• House purchases vs House rental
• Child education child success vs child failure
• Lifetime education
• Retirement leisure time vs less leisure time
• Healthcare health vs sickness
• Philanthropy humanity vs selfishness

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