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Converting Customer Lifetime Value into Investment Lifetime Value

Take your favorite vocal artists.  If you’d pay to expose your ears to their latest CDs, then it’s you who is valuable. Why, because you’re willing and able to buy their stuff.  Each time you ring a cash register, it is music to their ears.

Your purchases might be a fair measure of your “affection” for your artist, but your strong feelings without a wallet are meaningless. Think of capitalism as the high school prom and you’ve romantically chosen 3M Corporation as your date.  A starry gaze doesn’t cut it.  The best way to show affection is to buy some 3M “Post It” notepads. When you do, you add to your lifetime value.

Companies measure customer lifetime value (CLTV) by estimating how much you spend, how frequently you spend, and how long you’ll continue doing it.  The “eureka” here, is that you can amazingly apply the simple CLTV formula to your investments, because:

  • Customers provide companies revenue and your investments provide you revenue.
  • Customers have a “lifetime value”.  Your investments have this too. You are the “company.”
  • Companies incur costs to acquire customers. Your costs are the commissions and fees you pay your investment professionals.
  • Companies have profit “margins,” the difference between the money they make and their costs to make that money.  Your margins are the difference between what your returns earn you less your costs to make them, like advisory and investment fees.

Below is the ugly face of ILTV (Investment Lifetime Value) but what it tells us is beautiful.  It helps us understand the cost of choosing and keeping our investments.

ITLV = ∑ (Ma) r (a-1) /(1+ i)– AC

* M = margin
* r = retention rate
* i = interest rate
* AC = Acquisition costs



All things equal, we are looking for the highest ILTV.  ILTV gets lower when:

  • the denominator (bottom) increases
  • the numerator (top) decreases
  • “AC,” aka our upfront costs increase

Some things the formula tells us
1. Hold your investment longer, your retention (numerator) and ILTV can go up.
2.  Paying smaller fees for investments grows your margin (and ITLV).
3.  Be in the best investment you can find, because:

  • It lowers “i” since you’ll be apt to hold a “superior” investment longer.
  • Your costs to buy it (AQ) are less a drag, the longer you hold the investment.

Looking at “i” Your statement shows what you’ve gained, but you have no idea what you’ve given up for that gain, which “i” attempts to measure.  Considering an alternative investment that did better is and idea often lost by investors.  Be sure you select investments by using measures with predictive persistence.

Looking at “M”   Say you don’t have upfront commission costs, but have an ongoing advisory fee. This would be an annual cost that reduces “M,” your margin. The more you pay, the more M and ILTV drop.


The formula is a rough guide.  It works favorably with low volatility funds and, since research shows we hold our funds for only three years, we generally see low swings in our range of annual returns.

“r” or retention, does not play into ILTV. However when evaluating your portfolio of investments, (“PLTV”), it does, because there is a “defection rate” (1-r), or the rate in which you change investments in your portfolio. You can track your investment turnover to find this annual defection rate. For example say you replace 10% of your investments the first year, 50% on the second and 90% on the third.  Keep going until you’ve accounted for 100% turnover.

The “i” or discount rate you apply is your “cost of capital,” some other investment of similar risk you have forgone by choosing your particular investment.  A starting point is to use the annualized 3 year return of a superior investment from the same asset class with a similar beta and standard deviation. Relax– you can find the beta or standard deviation by entering “Google Finance” into your browser and entering  your investment’s name or symbol from your statments into Google Finance.  Look for beta and standard deviation on the page.

If the stated returns have taken out the expense ratio, your cost is zero and there is no change in your “margin.”  Otherwise subtract expense ratio from your returns and then apply it to the “M”.  Adjust down your margin for the annual advisory fee as well.  If you use an advisor and he or she is commissioned, then commission multiplied by the amount invested is your “AQ.”









The opinions voiced in this material are for general information purposes only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser prior to investing. Securities and advisory services offered through LPL Financial, a registered Investment Adviser. Member FINRA / SIPC

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Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at