Schulich finance professor Moshe Milevsky.The Globe and Mail
Moshe Milevsky is a finance professor at the Schulich School of Business at York University in Toronto. He has published dozens of articles on personal finance topics in scholarly journals and has written several books that summarize his research for general audiences.
The Globe and Mail recently interviewed Dr. Milevsky, 52, about his money strategies.
How do you invest your money?
A main principle that guides me is to look at my entire personal balance sheet. In other words, I believe one should diversify across both their financial and human capital.
For example, if you have a reliable and secure job, you can take more investment risk in your financial portfolio. Your knowledge, experience and labour generate a steady stream of income in a way similar to a bond, so your financial assets can have a high proportion of equities.
In my case, I have not only secure employment but also a guaranteed pension and a wife with a source of income. So, my allocation to stocks in my financial portfolio is 100 to 120 per cent, using margin and leverage to get it over 100 per cent. But when I take into account all the bond-like assets in my life, my true equity allocation is closer to 60 per cent.
What stocks are you invested in?
We hold mainly exchange-traded funds [ETFs] to own shares in a basket of businesses spread over different industries and geographical regions. We rarely hold individual securities, unless we missed our annual trip to Las Vegas and feel like making up for it by picking stocks.
But when The Globe and Mail ran a stock-picking contest in the 2000s, you won in all three years that you participated – why not do some stock picks for your retirement portfolio?
Investing to win a probability game is quite different than investing for retirement, as I wrote in a paper for the Financial Services Review (fall, 2005 issue). Your pick in a contest like The Globe and Mail’s should be very volatile and negatively correlated to the market or to what other participants tend to pick.
But even if one picks stocks more sensibly, studies show that they are still unlikely to beat low-cost index funds over the long run. I don’t recommend buying individual stocks, especially on the basis of reports in media outlets.
What other strategies do you use for your portfolio?
A second axiom of my financial life is to recognize that every investment I own comes with a silent partner, namely the Canada Revenue Agency. This means my wife and I gravitate toward Canadian dividend-producing ETFs in our taxable accounts, and higher taxed investments go in our RRSPs and TFSAs.
Aside from these obvious arrangements, there are other subtler things to consider. One is assessing your asset allocation on an after-tax basis: If a person is in a 40-per-cent tax bracket and has $100,000 worth of stocks in an RRSP, their real allocation to stocks is $60,000.
Your writing often challenges accepted notions. Is your just-published book (Longevity Insurance for a Biological Age) in the same vein?
I guess that could be said. It points out that scientific advances now allow us to estimate “biological age” and predict our remaining lifespan better than chronological age. Let’s then use this biological age for retirement planning.
Of note, if your biological age suggests you are going to live well into your chronological 80s or 90s, and you don’t have a pension with guaranteed income or aren’t exceedingly rich, you should place part of your savings in annuities.
Why annuities?
This is covered extensively in a book I co-wrote, titled Pensionize your Nest Egg. The main thing is that an annuity pays income for life and thus eliminates the risk of outliving your nest egg. Additionally, it can minimize the need to manage or oversee a financial portfolio at a time when you may not have the capacity to do so – all you have to do to get the income is breathe.
I’m not saying to put all of your money into annuities. They don’t let you leave an inheritance or cover an unforeseen major expense, whereas a portfolio of investments can do this. The latter also helps your wealth keep up with inflation if you don’t have any inflation-indexed annuities.
What about the risk of insolvency for the insurance firm providing the annuity?
Annuity payments in Canada are insured by a federally regulated body called Assuris. As happened when Confederation Life went under in 1994, this agency will transfer policies to solvent insurers to continue payments in full up to $2,000 per month or at 85 per cent if the annuity’s monthly payment was greater than $2,000 per month.
This interview has been edited and condensed.