Moshe Milevsky never intended to write another book about financial planning. But then the 42-year-old York University finance professor watched in horror as his family's net worth shrank by nearly 50 per cent in the great market crash of 2008.
It wasn't because he was highly leveraged or had taken unnecessary risks. A cautious investor, he had stacked his portfolio with stock in some of the biggest, supposedly safest, most successful American firms - GM, AIG and Lehman Brothers, among them.
To help recoup some of his losses, the industrious Mr. Milevsky - he's also executive director of the IFID (Individual Finance and Insurance Decisions) Centre and president of QWEMA (Quantitative Wealth Management Analytics Group) - returned to writing. Within a matter of months, he had produced Your Money Milestones - A Guide to the 9 Most Important Financial Decisions of Your Life (FT Press). It's his seventh book and a timely one, especially for those contemplating their annual contributions to retirement savings plans.
After all, as he notes in the introduction, if the investing wisdom of the ages was essentially rendered useless after the fall of 2008, on what should financial decisions henceforth be based?
Debt isn't evil. It's a potentially enabling tool. Moshe Milevsky
Written during an academic sabbatical which saw Mr. Milevsky lecturing at Wharton and in Sydney, the book incorporates some of the lessons he learned from the market meltdown. Central among these is the that the old paradigm - the stock market as a casino game in which savvy investors carefully calculate the odds of any particular wager succeeding - must be discarded.
In its place is the nuclear paradigm, so-called because no historical data would be of any value in predicting the next nuclear reactor accident. It therefore abandons all possibility of determining odds. In the new investing environment, a nuclear accident can occur at any time, without warning, making bets on stocks, even blue chips, inherently unpredictable.
From Mr. Milevsky - for three consecutive years, the top stock picker in The Globe and Mail's annual contest - this constitutes a fundamental rethink of prior assumptions.
Although the market turmoil convinced him to buy some gold coins as a hedge against rampant inflation, it is still possible, he maintains, to do financial planning. Here's how he breaks down the nine key decisions, as one moves through the life cycle.
Education Money should never be the sole, or even the most important, determinant of what one chooses to study. But clearly the career you choose will have an enormous impact on subsequent earning power and hence on your ability to afford retirement comfortably. In general, the extra investment in human capital required to earn a professional or graduate degree, even if it involves assuming short-term debt, will pay future dividends.
Caveat: if you choose a degree in the humanities, it is likely to cost you money; there, the extra investment needed to get the credential is not likely to be offset by future salary rewards.
Real estate A house is not just an investment, Mr. Milevsky cautions. Although equity in your home may increase annually, the net gain can be calculated only after totalling property taxes, repairs, landscaping, maintenance, etc. - the costs of consumption. Factor in all of these, he says, and many homes will register a negative internal rate of return. This applies, he confesses, even to his own house; although its sticker price is higher than it was when he bought it several years ago, his actual return if he sold it next month would be negative, given the other funds invested in it. As with education, other considerations - neighbourhood, schools, proximity to houses of worship - will inevitably influence decisions about buying or renting. But Mr. Milevsky argues that too many people ignore, at their peril, the implicit consumption costs of owning real estate.
Debt Consumers should be wary of assuming too much debt, Mr. Milevsky agrees. But the concern, he says, should be tempered with a careful assessment of other variables - notably, age, education and career. Focusing too narrowly on short-term debt pressures, students often abandon their education, forfeiting higher earnings down the road. "Debt isn't evil," he says, "It's a potentially enabling tool." To arrive at one's true debt, one has to include human capital in the calculations. And if your longer-term outlook is rosy, then taking on debt isn't such a bad idea.