Crossing the Finish Line

2nd September 2016

Most of us have heard of Warren Buffett, often referred to as “the Sage of Omaha”, who is considered to be one of the most successful investors in the world.  Fewer will be familiar with economist, professor and investor Benjamin Graham, despite the fact that Buffett credits him as being his mentor during his learning years.

Benjamin Graham is the author of a number of books including “Security Analyses” and “The Intelligent Investor” which is, according to Buffet, “By far the best book on investing ever written.”

I admire Benjamin Graham because he understands the importance of Financial Planning to the investment process.  He says “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go. In the end, what matters isn’t crossing the finish line before anybody else but just making sure that you do cross it.” He also recognises that “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

One really beneficial outcome of the Financial Planning process is that it will help you to understand the returns that you need from your investments in order to achieve your goals.  This will, in turn, help you make an informed decision about the nature of the risks that you are prepared to take and the compromises that you will make.

These insights were particularly helpful to Chris’s clients Peter and Emma, who came to see us because they want to be able to stop working soon in order to move to the coast. Emma has just turned 50 and Peter is one year older.

The initial conversation revolved around their hopes and desires; a small house by the coast and a modest lifestyle, nothing extravagant.  Peter and Emma’s enthusiasm convinced Chris that they are prepared to do whatever it takes to achieve their goals.  A few more open questions from Chris revealed this is because Emma’s mother had died age 55; Emma is becoming increasingly conscious that life can be short.

The challenge facing Peter and Emma is that they need to repay their mortgage and save sufficient capital for the rest of their lives over the next 4 years.

The bad news is that they have little in the way of savings.

The good news is that they each have deferred final salary pensions from the bank where they both used to work.

Final salary pensions are the gold standard for retirement income, offering a great deal of certainty and protection from investment risks and inflation.  However, they are not particularly flexible.  The bank pension scheme retirement date is 60 and, while it is possible for Peter and Emma to take benefits earlier, they had already established that their pensions would be reduced by 30% if they did so.

By following the Financial Planning process Chris was able to create a Lifetime Cashflow for Peter and Emma to test whether or not they would be able to do what they want to do.  Sadly the outcome was very clear – the reduction in their pensions means they will not be able to maintain their desired standard of living.

Chris then created another iteration of the Lifetime Cashflow to explore the option of taking a transfer value from their final salary pensions to invest in their personal pensions, which will allow them greater flexibility.  Such a transfer means that Peter and Emma will take on all the investment risk themselves and lose the certainties provided by the bank scheme.  Chris was able to calculate the investment returns that will be required and help Peter and Emma to understand the implications of the risks that they will be taking.

If you found yourself facing a decision like this what would you do?  Stay on a “safe” path even though you are certain that it will not take you where you want to go?  Or make an informed choice to take a less certain path because you are confident that you will be able to deal with the risks along the way?

Peter and Emma’s view is that any plan that does not give them a chance to achieve their goals is unacceptable; life is too short to compromise.

Our view is that the decision to substitute a predictable outcome for one that involves uncertainty and risk requires you to Plan with Fortitude.