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More About This Title Financial Advice and Investment Decisions: A Manifesto for Change
English
A practical guide to adapting financial advice and investing to a post crisis world
There's no room for "business as usual" in today's investment management environment. Following the recent financial crisis, both retail and institutional investors are searching for new ways to oversee investment portfolios. How do you combine growth with a focus on wealth preservation? This book offers you a fresh perspective on the changes in tools and strategies needed to effectively achieve this goal.
Financial Advice and Investment Decisions provides today's investment professionals with the conceptual framework and practical tools they need to successfully invest in and manage an investment portfolio with wealth preservation as a key concern. While there are many qualitative discussions, the authors present strong quantitative theory and practice in the form of small conceptual models, simulation, and empirical research.
- A comprehensive guide to properly managing investments with a focus on matching security and growth goals with the needs of the investor
- Blends insights gleaned from portfolio management practices used prior to the market mayhem of 2007-2009 with cutting-edge academic and professional investment research
- Includes innovative and wide-ranging treatment of subjects such as augmented balance sheets, the efficiency of markets, saving, spending, and investing habits, and dealing with uncertainty
- Description of opportunities for improving the investing environment
The recent financial crisis has opened our eyes to the need for improving the way we invest. This book will put you in a better position to excel in this new economic environment.
English
Jarrod W. Wilcox, PhD, is President of Wilcox Investment, and investment and financial planning services company emphasizing financial planning and effective risk management to promote sustainable growth, preservation of capital, and income. Wilcox Investment is an SEC-registered investment advisor. Jarrod is a former member of the faculty at MIT’s Sloan School of Management.
Frank J. Fabozzi, PhD, CFA, is Professor of Finance at EDHEC Business School and a member of the EDHEC-Risk Institute. Prior to joining EDHEC, he held various professional positions in finance at Yale University’s School of Management from 1994 to 2011 and was a visiting professor of finance and accounting at MIT’s Sloan School of Management from 1986 to 1992. He is also Editor of the Journal of Portfolio Management.
English
Preface xi
Acknowledgments xiii
About the Authors
CHAPTER 1 Why Do We Need Better Financial Advice? 1
The Individual 2
Organizational Influences 4
The Rest of the Story 10
CHAPTER 2 The Evidence Is Compelling 13
Financial Planning 13
Your Most Important Investment Decision 14
Option Payoffs are Not Simple 18
After-Tax Payoffs are Not Simple 20
Our Primitive Brains and Monkey See, Monkey Do 21
Others’ Agendas and the Perils of the Ivory Tower 22
CHAPTER 3 The Extended Balance Sheet Approach to Financial Planning 25
The Simplest Model 25
The Stochastic Dynamic Programming Alternative 29
The Mental Accounting Alternative 30
The Extended Balance Sheet 31
A Financial Planning System 37
CHAPTER 4 Properties of Mostly Efficient Markets 43
Multi-Agent Emergent Behavior 44
Why Security Returns are Difficult to Predict 46
Markets Bubble and Crash 48
Investment Implications of Market Characteristics 57
CHAPTER 5 Growing Discretionary Wealth 59
The Discretionary Wealth Approach 59
Elements of the Approach 60
Appropriate Markowitz Risk Aversion 73
CHAPTER 6 Coping with Uncertain Knowledge 79
Interpretation of Probability 80
Bayesian Probability Fundamentals 81
Resisting Forecasting Overconfidence 87
Making Estimates More Robust to Extreme Observations 95
Taking Context into Account 99
Making Better Use of Information in Decisions 102
CHAPTER 7 Controlling Investing Behavioral Biases 105
Facing Up to Complexity 106
Promoting Independent Thinking 115
Controlling Organizational Biases 117
CHAPTER 8 Tax Efficient Investing 121
Context 121
Taxes that Affect Investment Returns 123
General Principles of After-Tax Investing 131
Measurement of After-Tax Performance and Benchmarks 140
CHAPTER 9 Matching Investment Vehicles to Needs 143
Revisiting Risk Aversion 144
Taxes Again 146
Diversification 148
Higher Moments 150
Implementation 155
CHAPTER 10 Active vs. Passive Strategies 167
Pricing Efficiency and the Active–Passive Debate 169
CHAPTER 11 Performance Measurement 185
Relating Measurement to Purpose 185
Spending Control 187
Measurement for Individual Passive Investing 190
Performance Reporting for Active Investors 197
Delegating Your Investments Based on Measurements 208
Measuring vs. Evaluating Performance 213
CHAPTER 12 Organizational Investing 217
Representative Investing Organizations 217
Delegating Superior Investing Results 232
Motivating Organizational Benefits 241
CHAPTER 13 Financial Advice and Society 243
Social Ideals and Financial Problem Symptoms 245
Redesigning Society with Better Financial Advice 248
And in Conclusion… 274
APPENDIX A
Traditional Asset Classes and Alternative Assets 275
Asset Class Defined 275
Common Stock Asset Classes 276
Real Estate 278
Alternative Assets 280
APPENDIX B
Bond Features, Yield Measures, and Risks 287
Features of Bonds 287
Yield Measures and their Limitations 289
Call and Prepayment Risk 296
Credit Risk 297
APPENDIX C
Probability Distributions Commonly Used in Investment Management 301
Normal Distribution 301
Student’s t-Distribution 303
Stable Distributions and Stable Paretian Distributions 303
APPENDIX D
Useful Financial Planning Formulas 305
Working with Present Values 305
Determining the Required Savings-to-Income Ratio 305
Taking Initial Investments and
Needed Retirement Income Reduction into Account 306
Investment Return Mean and Variance 307
Deriving an Estimate of Discretionary Wealth Growth Rate 307
Estimating Appropriate Expected Return for Compounding 308
References 311
Index 321
