The Aspirational Investor: Taming the Markets to Achieve Your Life's Goals | Book Review

Ashvin B. Chhabra's Aspirational Investor advocates what the author calls "an entirely new approach to managing wealth," which is based on achieving personal goals and managing risks rather than relying exclusively on the market. (If you think about the term Modern Portfolio Theory Plus, The Aspirational Investor is the plus.)

To this end, Dr. Chhabra, who was Chief Investment Officer at Merrill Lynch, proposes a Wealth Allocation Framework to accommodate three needs: financial security, maintaining one's standard of living despite inflation and living longer, and pursuing one's aspirational goals. He also characterizes these as essential goals (safety and shelter), important goals (being able to support those who are important to you), and aspirational goals (pursuing your dreams), respectively.

Naturally, the approach splits all of one's assets and goals into three buckets based on risk, where each bucket corresponds to each of the three needs. The safety bucket contains the lowest risk and lowest return assets, the important goals bucket contains a diversified market portfolio which should earn market returns, and the aspirational bucket contains speculative investments, one's business, and so on, basically anything that has the potential for high returns but can also go down to zero.

Chhabra provides a seven step process on how to implement the buckets and how to evaluate the riskiness of certain assets. How risky something is depends on one's situation and goals, and different people might have the same asset in different buckets.

Chhabra argues for converting one's goals into cash flows (how much money you need to save now to achieve your goals) and provides simple but powerful formulas to calculate them. In general, the formula is

savings required for [goal] this year = cost of goal in today's dollars divided by the number of years you have to achieve the goal

The following year, you perform the same calculation, except you use that year's dollars and subtract what you have already saved.

For example, let's say your goal is to pay for your kid's college, which will be in 18 years and currently costs $120,000 (four year tuition). Per the formula, the first year you should save $120,000 / 18 years, or $6,667. The second year, let's say college costs are $122,000. You reduce the $122,000 by the $6,667 you already saved, which is $115,333, and divide that by the number of years remaining, which is 17. Per the formula, you would save $6,784 the second year. Proceeding thus for the 18 years would enable you to save the inflation adjusted amount for the college tuition.

You should do this cash flow savings method for all of your goals, which includes retirement.

How you save the converted cashflows depends upon your goal and where it fits in the risk allocation framework.

This is quite powerful, but also daunting, especially for people who are short on savings and working years.

The Aspirational Investor seems to be targeted toward higher income earners and people who are already in the habit of saving. For the latter, Chhabra provides a method that reduces risk as well as a clearer picture of how much is needed for each goal.

Another category that would benefit most from the book is young people. I certainly would have benefited from reading it 15 years ago (not that I could, as it was published in 2015). Following its simple principles would have made me far better off. If you're young, read The Aspirational Investor!

Aside from the meat of the book, Chhabra does a good job of discussing many of our cognitive biases, our inability to predict markets, and how these lead to poor results. He also has two interesting chapters comparing the famous Yale Endowment investing model and Warren Buffett's Berkshire Hathaway in terms of the risk allocation framework. These serve as an illustration of how similar assets belong in different risk buckets for different institutions (or people).

The short book is well worth the time it takes to read it, but it's probably more cost effective to take it out from the library than to buy it.