Book Review of ‘The Aspirational Investor’

Debashis Basu 10 July 2015

Glowingly recommended by two Nobel Laureates, it falls short

I have read many books on investing but have not come across one with such glowing recommendations. Praise for The Aspirational Investor by Ashvin B Chhabra comes from five extraordinary people. One is Dr Harry Markowitz known for his pioneering work on modern portfolio theory who won the Nobel Prize in 1990. Jim Simons, one of the top traders in the world, is a mathematician who applied himself to studying pattern recognition and now runs Renaissance Technologies which manages $25 billion. He says that this book is an “original programme to guide an individual.” Glowing endorsements also come from Eric Maskin, Nobel winner in 2007, as well as Burton Malkiel and Charles

D Ellis, two seminal writers on investing. What is so great about this book?

Chhabra brings some fresh thinking to financial planning. He advocates that investors should create a three-tier portfolio. The first, called essential portfolio, will help you protect your current lifestyle and should be invested in safe products. The second, labelled important, should be to help meet long-term goals such as retirement. This should be invested in market-linked products. The third portfolio is aspirational portfolio where you should put high-risk products. This is fine in theory. How does one implement it? Chhabra outlines seven steps for this purpose.

Step1: Outline Your Goals: Categorise your goals as essential, important and aspirational. A young couple, at an early stage in their financial life, might have goals that include savings for college, owning a home and starting a business; while a wealthy retired couple may have only two goals: maintaining their lifestyle and leaving a legacy.

Step2: Goals into Cash Flows: Put numbers to your goals. Quantify the total amount needed today for virtually any goal using one easy formula: amount needed divided by the number of years. If you do this every year, you eliminate the complications of inflation-adjusted cost.

Step3: Create Your Wealth Allocation Snapshot: Next, put together everything you own and everything you owe. “This is the step where you will organise your assets and liabilities across the personal risk, market risk, and aspirational risk buckets” and place them in appropriate buckets.

Step4: Assess Your Risk Allocation: Chhabra now wants you to do the right risk allocation across your safety, market, and aspirational portfolios. Can you? As Albert Einstein had said, “everything should be made as simple as possible but not simpler.” Sure enough, Chhabra’s approach breaks down at this stage. He writes, “Alas, there are no exact answers, but there are good guidelines. Your optimal allocation depends on a variety of objective considerations and should strike a balance between factors such as your age and earning potential, your total current wealth, and the ratio of your assets to the amount you need to sustain your lifestyle. Subjective factors such as your goals and your ability to bear losses are also key factors.”

Chhabra goes on to say, “A thorough analysis of your optimal risk allocation must take into account both your financial ability and your psychological ability to bear losses. If you have no ability or desire to take on risk—or, conversely, you have a high tolerance and ability to take on risk—then either a conservative or an aggressive risk allocation may be warranted, defined by the degree to which you allocate assets on a relative basis to your safety portfolio or your aspirational portfolio.” Can anyone do this by oneself? No.

Step5: Implement Asset Allocation and Portfolio Diversification: Just as the goals of each risk bucket are different, so, too, are the securities that you will hold within them, as well as the way each portfolio is constructed. Once again, hard for individuals to do it.

Step6: Analyse & Stress Test: Chhabra asks his readers to put their portfolio through the following tests: market meltdown test, loss of employment test, sustainability test, aspirational goals test, etc. This, too, is impossible for an individual to handle.

Step7: Review and Rebalance: If you are able to take the six steps, you would then have to take the last step which is an annual exercise to keep your finances on track.

Given how much the book is hyped up on the jacket and the recommendations the author has obtained, all this is a bit of a let-down. Perhaps financial planners may have some use of this book.

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