I recently finished reading The Affluent Investor by investment adviser Phil DeMuth (a frequent co-author of Ben Stein’s). I would consider it a must-read for any professional, but I also found much of the book to be particularly salient for lawyers. In this article, I want to focus on one chapter that presents an investing framework for professionals based on two related market concepts: beta and volatility.
In that chapter (Chapter 4), DeMuth explains the difference between these two metrics:
- Beta: this figure tracks how sensitive an investment is to the stock market. The example DeMuth uses is demand for milk. If the market goes up, you will still need to purchase milk for your children. But if you’re planning an expensive vacation and the market plummets like it did in 2008, you might decide to stay home.
- Volatility: this concept is essentially the same thing, but better defined as unpredictability that doesn’t necessarily have a direct tie to the stock market. For example, if you are a government employee, your job is probably going to be stable no matter what is happening in the markets. But if you are a stock broker or a tech industry employee who is compensated primarily through stock grants, you index high for both beta and volatility.
But what’s interesting about the chapter is how DeMuth goes on to apply these concepts to your career and earning potential in order to help you think about how you should invest. “Low beta/low volatility workers can take more risk,” he writes. “If you have a volatile job, you should take less investing risk, other things equal. If you have a high beta job, you should take the least risk, because the volatility will hit you at the same time it hits your portfolio.” (During this discussion DeMuth also cites a book by Moshe Milevsky called Are You a Stock or a Bond, which I have not read, but I’ve added it to my Goodreads list.)
I also think that some of DeMuth’s theories, presented in this same discussion, as to why doctors don’t invest well are also applicable to lawyers and other white collar professionals in general. I think they echo some of my own theories from another recent article here at Dollar Barrister:
- They’re overconfident. Most doctors, lawyers, and other highly educated professionals are by nature Type A personalities that have a great deal of confidence in their own abilities (otherwise they wouldn’t be as successful as they are.) So they assume that they’ll be just as successful investing as they are in their careers. And while some of them might be, that’s not always the case.
- They’re busy. It’s not uncommon for white-collar professionals to work 60+ hours a week. Factoring in a commute and family time leaves very little room for focusing on investments, or even just paying attention to bank account and credit card balances. That’s not a recipe for successful personal finance.
- They assume finance professionals have expertise like their own. Not every financial advisor has the same level of education and professional training as a doctor, lawyer, or other white-collar professional. So paradoxically even though they need it the most, hiring a financial advisor might end up being problematic for a high-earning, busy white-collar professional.
- They are a targeted high-risk group. There are always going to be sharks out there looking to make money off those who have money. You need to be careful! Don’t flaunt your wealth, live below your means, and pay yourself first – always!
DeMuth also writes specifically about lawyers, saying that “lawyers are smart, and they should be great investors, but their profession puts them at high-risk. Not to themselves, but to anyone investing money on their behalf. [In the sense that lawyers have a reputation for being litigious, so financial advisers may be reluctant to take them on as clients. This hasn’t been my experience, but YMMV.] As for how being an attorney affects your beta, it depends on your specialty. I [also] speculate that both doctors and lawyers are at high risk for divorce. Divorce can be a very expensive proposition for those with super-sized incomes.”
So what does all of this mean for us, as attorneys or other white-collar investing professionals? Let’s start with me: I consider my current in-house position to be a medium volatility, medium beta position. I work for a public company and there are aspects of my compensation and career prospects that I think are justifiably tied to the stock market. However, I don’t believe that a dip in the share price will cause massive layoffs and put my job in jeopardy.
I also believe that my company’s services (and our competitors’ if I ever need to look for another job) will be in demand regardless of how the stock market performs. And that has been pretty consistent historically. For these reasons, I am trying to be more aggressive about my savings. Not reckless, but tilting my asset allocation towards more equities (even though I have a lot of concerns about the stock market being overvalued – more on that in a future post).
On the other hand, in my prior in-house position, nearly half of my compensation was in the company’s stock, which although it has performed extremely well, was in a much more volatile industry. So at that time, as a highly volatile and high beta employee, I should have been more heavily invested in cash and bonds (I was not, but that was before I started to really focus on these issues as they relate to my own personal finances.)
Looking back even further on my career, if I were a junior associate in a Biglaw firm, or just starting out in another profession after college or graduate school, I would consider my position to be both highly volatile and high beta. For example, when I was a mid-level associate during the 2008 stock market swoon, junior associates everywhere where getting laid off or having their start dates pushed back. I could see something similar happening if this extended bull market starts to slow down in the near future (and I feel like it might). In those cases, I would fully fund my tax-advantaged accounts and then hoard cash and low-risk investments like CDs or high-yield savings accounts.
Do you think there are certain white-collar professionals or other highly compensated positions that are low volatile and low beta? Do you think this analysis presents a useful investing framework or not?