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Speed Review: The Aspirational Investor

Speed Review: The Aspirational Investor

Speed Review: The Aspirational Investor

Taming the Markets to Achieve Your Life's Goals

by Ashvin Chhabra

The Chief Investment Officer of Merrill Lynch Wealth Management explains why goals, not markets, should be the primary focus of your investment strategy—and offers a practical, innovative framework for making smarter choices about aligning your goals to your investment strategy.


A Different Kind Of Investment Strategy

To succeed as an investor, you need to beat the market. That, at least, is how most investors view their financial goals. Discussions with financial advisors are focused on whether investments did better than the market; if they didn’t, the advisors better have a good explanation for their clients.

According to Ashvin Chhabra, Chief Investment Officer of Merrill Lynch Wealth Management and the author of The Aspirational Investor, investors have their priorities mixed up. The goal should not be to beat the market; the goal is to build an investment strategy that helps you achieve your personal objectives and aspirations. As Chhabra shows, refocusing on personal objectives and aspirations rather than just beating the market requires a different kind of investment strategy.

Traditional investing is designed to manage risk through what is known as modern portfolio theory. Modern portfolio theory is not so modern (Chhabra calls the name “ironic”); it was developed by a University of Chicago graduate student in the 1950s named Harry Markowitz, who argued that the only way to manage risk in volatile markets was to invest in a portfolio of stocks and bonds with a variety of risk. For example, if stocks take a hit, bonds go up. Therefore, a combination of stocks and bonds is less risky than a portfolio of only stocks.

For Chhabra, modern portfolio theory is based on investments as a supplemental source of income for an era in which retirement income was based on social safety nets and stable pension plans. Those days are gone, he writes, and now it’s mostly through investments that individuals must not only create wealth but also build a foundation of financial security. In other words, investors today must use their investments to achieve three objectives, Chhabra writes: “financial security in the face of known and unknowable risks,” “maintain your living standard in the face of inflation and longevity” and “pursue aspirational goals, be it for personal wealth creation, to create positive impact or to leave a legacy.”

Unlike the general, all-encompassing goal of beating the markets and making money, an investment strategy based on personal objectives implies three different risk strategies. This “allocation” of risk is at the heart of Chhabra’s theory, which he calls the Wealth Allocation Framework. Risk allocation, Chhabra explains, “is achieved by creating three distinct risk buckets to support each of the corresponding three key objectives of your wealth management strategy.” The three risk buckets are:

  • Personal Risk. Investors must “immunize” themselves against personal risk — not being able to pay their bills. No matter what the markets do, personal risk is non-negotiable: Failure is not an option.
  • Market Risk. The cost of living will inevitably increase over time. Maintaining your lifestyle thus requires, according to Chhabra, “earning a rate of return in the financial markets that is comparable to the increase in the cost of living.” To earn such a rate requires adopting the diversification principles of Markowitz’s portfolio theory.
  • Aspirational Risk. To fulfill your aspirational goals, you will need to create significant wealth; the only way to build substantial wealth is to invest in high risk/high gain portfolios. You can’t win big without taking the risk of losing big.

As expected from a chief investment officer, The Aspirational Investor is not a theoretical treatise on financial markets but a practical guide for investors. Chhabra digs deep into the investment-decision implications of the three risk buckets, including, for example, a seven-step implementation plan for what he calls “objective-driven investing.”

Most investors should probably read this book before making any further decisions on their investments: Very few of us can afford to ignore any of Chhabra’s three risk buckets.