Managing money for the long term


Managing money for the long term

As a wild generalisation, people are not very good at appreciating the impact of inflation over time. As part of this issue, savers also put excessive faith in cash now rather than cash later, so there is a great deal of scope for people to make poor decisions, repeatedly during their lifetime.

The Daily Mail reported the investment return on a misplaced Post Office Savings book between 1954 and 2018, where £1 1s 7d became only £4.88 over 64 years. To put inflation in context over the period, to have the same buying power that £1 1s 7d had in 1954, you would need to have £28.67 in current legal tender.

Cash is usually seen as a “safe” place to store value when, in reality, inflation is eating away at its value all of the time. In 1971, decimalization changed £1 19s 7d to £1.98 and 46 years later, NS&I paid out £4.88, an average return of 1.96% per annum, with inflation over the same period being 5.78% per annum.

As soon as you can identify money that is not likely to be spent in the next few years, you need to move away from cash as a store of value and look to some form of investment. For many people, this is a very big step to make as saving gives you a “safe”, predictable return and any investment is not absolutely safe, neither is it predictable. As a reasonable expectation, an investment ought to give a return greater than cash, but the actual return will depend on a number of factors, both predictable and some more random in nature. At its worst, investment always has the prospect of a net loss in value, so you would not do it with money for your next meal, the rent or the mortgage.

Any adviser worth the title will establish that you have some emergency funds and money to live on before advising investments, but to go “too safe” is also a problem.

Warren Buffet, the veteran investor and investment manager writes to the shareholders of his business annually and always states some investment home truths that are worth taking on board. After the events of 2017, he said:-

"Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained.

By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a long-term investment in common stocks. At that time, even a 1% annual rate of inflation between 2012 and 2017 would have decreased the purchasing-power of the government bond that Protégé and I sold.

I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk."  (http://www.berkshirehathaway.com/letters/2017ltr.pdf, page 12 of 16).

Very few people have the US$114.5Billion of “insurance float” that Mr Buffet has at his disposal, but some rules hold true for even small investors.

  1. Never invest all of your money; you need an emergency fund to deal with the unexpected and you need cash to pay for day to day living.

  2. Where the likely investment period is long, you need an exposure to equities, (company shares), for long term growth.

  3. Where the likely investment period is shorter, then a mix of asset classes is important to manage risk and liquidity, (the ability to turn investments to cash).

  4. The investors friend is diversity; lots of different holdings in many different markets, so if one does badly, then others should compensate. Having every share in the FTSE 250 is not a diversified portfolio, it is a jury-rigged tracker fund!

  5. Try to avoid ever being backed into a corner; the day you have to sell a specific, long-term investment is the day you will make a realised loss.

  6. One of the few certainties of investment is the cost of trading; chopping and changing, large scale changes in strategy and excessive fees will take the gloss off even a successful investment.

  7. Steer clear of the complex scheme; if you do not understand how you make your money over time, do not do it. Investment should never be complicated as the basics never change. You try buy an asset that gives you a return, income or capital growth or both over time, that is worth more at the end of the period than it was at the start.

  8. Don’t panic! If you are invested for the long term and the market takes a dive, then so long as you can live in the present and you have cash for the basics, you can bide your time for a recovery. So far, every big recession has been followed by a recovery and there is little to suggest the rules are different this time.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.