A few things I learned in several decades as a financial planner

A few things I learned in several decades as a financial planner

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After a few years of working with clients and the range of challenges that they are facing, I have noticed a few things which pop up repeatedly.  In no particular order therefore, here are some of the lessons which I have picked up and which probably apply to many of you.

Don’t expect to be average

Whether it comes to your life expectancy, the rate at which your expenditure changes or the range of future investment returns, relying on averages can get you into difficulty.  However far back you go historically in search of data on investment returns, the future is never exactly the same as the past so you should not expect that returns will be either.  It is inevitable that some people will end up above average and some below, regardless of where that average is.

Avoid conflating historical averages with future expectations

While historical data is useful in establishing some reasonably common long-term relationships, there is no guarantee that these will be maintained during your own investment timeframe.  It is easy to come up with an assumption to three or four decimal places but the greater precision of this compared to a whole number does not equate to greater accuracy.  Instead, by using a figure which is more precise, it creates an illusion which is most unlikely to be reflected in reality over several decades.  The Bank of England employs many great researchers yet a 2015 study of its ability to predict inflation and other economic indicators accurately showed that it was surprisingly wide of the mark even though it was looking ahead only a couple of years each time.

Every question in financial planning has (at least) two answers

While we might appear to expend a lot of effort on determining the mathematical one, it can be more important to consider how you feel about something.  For example, if you have two children, one of whom has three children of their own and the other has none and you wish to make a contribution towards education costs, it is mathematically fairest to your children to give them equal amounts.  However, this may be insufficient to meet the actual costs in the former case and may be entirely unnecessary in the latter so you may feel that it is fairer to allocate funds disproportionately.

There is more than one way to skin a cat

While relatives, friends and colleagues may be keen to pass on their advice about financial matters, that doesn’t necessarily mean that the same approach would work for you.  Leaving aside the possibility that they may only tell you about their successes and play down or ignore entirely their other experiences, it is not necessary for them to be wrong for you to be right.

Once you achieve a certain level of wealth, taking investment risk is unnecessary

For example, James Dyson (of vacuum cleaner fame) and his family is apparently worth around £16 billion.  If he cashed it all in tomorrow and kept it all in banknotes, he would probably be financially okay for some time.  Admittedly, the value of his fortune would be eroded by inflation but not at the sort of rate that would compromise his ability to live a reasonably comfortable life.  Alternatively, he could invest it all in equities and almost regardless of what the stock market did, he would still be financially secure.  While you may not achieve such success yourself, when measured against your own expenditure plans, it is entirely possible that there will come a point at which taking investment risk is a choice rather than a necessity.

If something goes wrong following a decision that you made, don’t blame yourself

Mercedes Formula One team boss Toto Wolff said last year that it is the races that the team loses from which they learn most.  While there is value to reviewing decisions and considering what other actions you could have taken, there is absolutely no certainty with investing that the next time a similar situation arises, taking a different course will result in a better outcome.

Paying tax is not always something to avoid

Almost nobody enjoys paying tax but generally, taxes are a symptom of some form of success.  Maybe your income exceeds the level at which tax starts to be due or you have made a gain on an investment compared to what you paid for it.  If you are tempted to seek to avoid paying tax on gains in your portfolio, remember that the tax is almost always less than the gain and that you would probably not be happier if your investments only made losses.

Don’t assume that it is easy to tell how wealthy someone is by outside appearances

Warren Buffett lives in a modest suburban house that belies his considerable wealth.  Other people can appear to be hugely successful but their lifestyle is financed by significant debt which makes them seriously vulnerable to an adverse change in their circumstances.  It is just not that easy to tell what someone else’s life is like with a cursory look from the outside.

Nobody has all the traits that are desirable to manage an investment portfolio

Doing so requires a combination of optimism, pessimism, economics and psychology.  This is why many investment managers use teams or committees in their decision-making process because to do otherwise entails the risk of the strategy being skewed too much in one direction.  If you are doing it yourself and you know that you are an optimist, it is worth running your decisions past someone you know who is a pessimist in case they have insights which may be less familiar to you.

Risk tolerance is not static

Although, by the time you have acquired some experience of investing you have probably lived through several market falls, the impact that these have had on your risk tolerance is not constant.  When you are young, and still earning, it is reasonable to react positively to these as they allow you to purchase more assets for the same outlay.  Accordingly, you can afford to be fairly sanguine about price fluctuations in the knowledge that you have the ability to weather them.  This may be because you still have the ability to save part of your income or because you know that it will be many years before you need to draw on your portfolio.  However, you have no experience of how you will feel during a markets decline once this is no longer the case and you are reliant, at least to some degree, on your financial assets.

Uncertainty reduces with time

Strictly speaking, this is not the case because there is always uncertainty, particularly with regard to your state of health and market movements.  However, some of the variables do reduce as each year passes, such as your earnings, the impact of changes in mortgage rates and the costs of education.  Consequently, with fewer variables to account for managing your financial plan generally becomes easier with age compared to the early years of adult life.