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14-lifetime-financial-advice-human-capital-asset-allocation-and-insurance.html
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<title>Study Session 4 | Reading 14 | Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance</title>
<meta name="description" content="Chartered Financial Analyst Level 3 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<h1>Reading 14</h1>
<h3>Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">AlchemistsAcademy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Human Capital and Asset Allocation</h2>
<ul>
<li>Human capital - the economic PV of an investor's future labor income</li>
<li>Human capital should be considered alongside financial and other assets in the asset allocation process</li>
</ul>
</section>
<section>
<h2>Asset Allocation Implications</h2>
<ol>
<li>Investors should invest financial assets in such a way as to diversify and balance out their human capital</li>
<li>A young investor with relatively safe human capital assets and greater flexibility of labor supply should invest more financial assets in risky assets than an older investor. This proportion should be reduced as the investor ages</li>
<li>An investor with human capital that has a high correlation with stock market risk should reduce the allocation to risk financial assets</li>
</ol>
</section>
<section>
<h2>Human Capital and Life Insurance</h2>
<ul>
<li>Mortality risk - the family's loss of human capital in the event of an investor's premature death</li>
<li>Life insurance can be purchased as a perfect hedge to mortality risk</li>
</ul>
</section>
<section>
<h2>Life Insurance Implications</h2>
<ol>
<li>Investors need to make asset allocation and life insurance decisions jointly</li>
<li>The magnitude of human capital, its volatility, and its correlation with other assets significantly affects both decisions over the life cycle</li>
<li>Bequest preferences and subjective survival probabilities significantly affect an individuals demand for life insurance</li>
<li>Conservative investors should purchase more life insurance than less conservative investors</li>
</ol>
</section>
<section>
<h2>Retirement Portfolio and Longevity Risk</h2>
<ul>
<li>Three retirement risk factors</li>
<ol>
<li>Financial market risk</li>
<li>Longevity risk</li>
<ul>
<li>Social Security/DB pension plans</li>
<li>DC plans/personal savings</li>
<li>Payout annuities</li>
</ul>
<li>Spending uncertainty risk</li>
</ol>
</ul>
<aside class="notes">
Financial market risk is the risk that markets will fall early during an investor's retirement, rendering their portfolio unable to generate the necessary income; it can be mitigated by modern portfolio theory Longevity risk is the risk of living longer than expected and depleting retirment assets. Longevity insurance is embedded in Social Security and defined benefit plans because benefits are paid out for the beneficiary's lifetime. In contrast, defined contribution and personal savings plan expose the investor to longevity risk as these assets can be depleted. To protect against this, investors may purchase fixed- or variable annuities that pay out over the investor's lifetime. Spending uncertainty risk is the risk that an investor may not save enough to adequately fund their retirement portfolio.
</aside>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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