1. Getting risk right is very important. It's nearly impossible to go broke by picking bad investments if you get the sizing right, but it's easy to go bust by taking too much risk, even if you choose great investments! Taking twice the optimal amount of risk completely wipes out the risk-adjusted benefit of a good investment and taking more risk than that makes you exponentially worse off than doing nothing at all. Too much exposure, even to really good investments, can end in total wipeout. The Merton share is a useful rule of thumb and starting point for determining the right exposure to take. Optimal investment size is a function of personal risk-aversion, and goes up in proportion to expected excess return and down in proportion to risk measured as variance.

2)Markets are highly competitive. A good working assumption is that you cannot get more return without taking more risk. However, it is easy to get more risk without getting more return. For example, you probably won't get compensated for bearing stock-specific, idiosyncratic risk that can be eliminated through diversification. Maximise diversification across all asset classes, including international markets, and avoid zero-sum activities where you do not have an edge. Steer clear of leverage, shorting, concentration, and complexity. Accept that it is unlikely you can beat the market with public information. When considering stock-picking, bear in mind that the majority of individual US stocks have returned less than T-bills.

3. Decide how to measure your financial well-being. If it's your capacity to spend on your needs, wants, and gifts to others over your lifetime, then it's the real, after-tax income stream that your capital can generate and that you can spend over time that matters, not the lump-sum present value of your wealth. This perspective on financial well-being makes inflation-protected bonds (TIPS) and equities less risky than they appear on a present value basis and T-bills and fixed rate bonds riskier.

4. More income is better than less, but each additional unit of "more" generates a decreasing marginal unit of "better." This decreasing marginal utility of income and spending is what makes us risk-averse and makes us require compensation to bear risk. Making your investing, saving, and spending decisions to maximise your Expected Lifetime Utility of spending can improve your expected lifetime welfare by 25%-50% relative to following simpler heuristics such as the "4% rule" for spending, the "hundred minus age rule," or the "maximise the probability of reaching a goal" for asset allocation. Maximising expected wealth is perhaps the most dangerous of all possible objectives.

5. You need to know the Risk-adjusted Return (RAR) of your investment portfolio to decide how much to spend and save over time. The RAR of an investment is
   its expected return minus the cost of bearing its risk.

6)To make good financial decisions, you'll need estimates of the distribution of returns of the investments you're considering and the correlation between them, assessed on a real, after-tax basis. It is usually easier to do this to a long-term horizon for assets with returns that are naturally thought of in real terms and for those that generate cash flows. TIPS, equities, and real estate meet these criteria. Assets that are more difficult to evaluate are nominal bonds; assets whose returns depend mostly on what someone will pay for them in the future, such as collectibles, commodities, and crypto; and assets whose expected returns depend on extrapolating from past performance or expecting a reversion to historical averages, which is the case for most active investment strategies.

7. Take explicit account of your human capital, especially if you are young. How big is it? How uncertain is it? Are you more like a stock or a bond? Consider reducing exposure to investments that are correlated with your human capital, such as equity of the company where you work. The more flexibility you have to affect its size, the more investment risk you can take. Make your asset allocation and spending and saving decisions based on your total wealth, which is the sum of your financial savings and your human capital.

8 ) The long-term expected return and risk of assets vary over time, and you should dynamically update your asset allocation and spending and savings decisions accordingly. Lower expected returns or higher risk relative to safe assets should lead to a lower exposure to risky assets and to lower spending and higher saving. Lower returns offered by safe assets, holding the excess return and risk of risky assets constant, should not lead to a change in asset allocation but will call for lower spending and higher saving.
9) Dynamic asset allocation can improve lifetime expected welfare significantly. You can do it yourself or hire someone to do it for you for a low fee. The next best option is to stick to a static asset allocation comprised of a low-cost global equity index fund with most of the rest invested in long-term TIPS, with weights that make sense under typical market conditions, given your personal level of risk-aversion and taking the size and nature of your human capital into account.

10 ) Saving and spending should be regulated toward generating a smooth spending stream over time, while recognising that they need to be updated in-response to changes in the value of your total capital, including your human capital, and in the Risk-adjusted
Return you expect to earn.

11. Most big financial decisions require putting a cost on risk and cannot be answered by only considering the most likely outcome.

12. Try to make your decisions as early as practical, to make the most of the power of compounding and the structure of many tax benefits.

13. Control what you can by being attentive to fees, taxes, and efficiency in expenditures. Financial products are often an exception to the rule that the more you pay for a service, the better its quality.

14. Strive to be disciplined, rules-based, and algorithmic in your investing in order to keep your behavioural foibles at bay. Know thine enemy-it is primarily yourself, but don't forget that many others will be trying to get a slice of your financial pie too.

15. No plan is perfect, but it is better to stick to an imperfect but sensible plan than to keep changing the plan, which can often give a backdoor entrance to harmful practices, such as return chasing. Decisions that are in the general vicinity of optimality will give you nearly all the benefits of going all the way to the hypothetically perfect spot.

16. There's more to life than your financial well-being, but getting that right will help with everything else.

A Few Rules of Thumb

Constant Relative risk-aversion (CRRA) utility

[$$ U(W) = \frac{1 - W^{1 - \gamma}}{\gamma -1} for \ \gamma \neq 1 $$](tex://$$ U(W) = \frac{1 - W^{1 - \gamma}}{\gamma -1} for \ \gamma \neq 1 $$)

[U(W) = \ln(W) for \ \gamma = 1](tex://U(W) = \ln(W) for \ \gamma = 1)

Merton Share for asset allocation, risk-taking, and bet-sizing

[\hat{k} = \frac{\mu}{\gamma \sigma^2} where \ \gamma \ is \ equivalent \ to \ Kelly \ Criterion](tex://\hat{k} = \frac{\mu}{\gamma \sigma^2} where \ \gamma \ is \ equivalent \ to \ Kelly \ Criterion)

Risk-adjusted Return a.ka. certainty equivalent Return

[r_{ce} = r_{rf} + \frac{\hat{k} \mu}{2} for \ optimal \ \hat{k} \ more \ generally](tex://r_{ce} = r_{rf} + \frac{\hat{k} \mu}{2} for \ optimal \ \hat{k} \ more \ generally )

[r_{ce} = r_{rf} + k \left( \mu - \frac{k \gamma \sigma^2}{2} \right)](tex://r_{ce} = r_{rf} + k \left( \mu - \frac{k \gamma \sigma^2}{2} \right))

[Cost \ of \ Risk = \frac{ \gamma \left( k \sigma \right)^2}{2}](tex://Cost \ of \ Risk = \frac{ \gamma \left( k \sigma \right)^2}{2} )

Optimal Spending

[\hat{c}{\infty} = r{ce} - \frac{r_{ce} - r_{tp}}{\gamma} for \ infinite \ life \ and](tex://\hat{c}{\infty} = r{ce} - \frac{r_{ce} - r_{tp}}{\gamma} for \ infinite \ life \ and )

[\hat{c}t = \frac{\hat{c}{\infty}}{1 - \left ( 1 + \hat{c}{\infty} \right )^{-T}} for \ finite \ life \ T, .i.e. \ wealth \ annuitised \ over \ T \ at \ rate \ \hat{c}{\infty}](tex://\hat{c}t = \frac{\hat{c}{\infty}}{1 - \left ( 1 + \hat{c}{\infty} \right )^{-T}} for \ finite \ life \ T, .i.e. \ wealth \ annuitised \ over \ T \ at \ rate \ \hat{c}{\infty} )

[for \ \hat{c}_{\infty} = 0, \ \hat{c}t = \frac{1}{T}](tex://for \ \hat{c}{\infty} = 0, \ \hat{c}_t = \frac{1}{T})

Symbols and Assumptions

• W is wealth
• c is consumption as a fraction of wealth per unit time
• k is the fraction of wealth allocated to the risky asset
• \hat{k} is the optimal allocation
• \gamma is coefficient of risk-aversion in CRRA utility ( for wealthy investors above subsistence typically 2-3, the higher the more risk averse)
• r_{rf} is the safe asset return real return
• r_{tp} is the investor's rate of time preference ( typical values 0%-4%)
• \mu is the expected excess return of risky asset above safe asset return. 3% - 6%. for broad equity market arithmetic return
• \sigma is the volatility of risky asset.