“People are not afraid of uncertainty, they are afraid of change.” The quote is from Joe Tye, CEO and Head Coach of Values Coach Inc.
I believe it is smart to minimize the variables in any question. People have enough trouble participating in simple things. Minimizing complexity without removing the essence of the situation is an art form. Work at the skill.
What can we learn from Joe’s idea?
Be cautious in respect to investment risk descriptions. Investment advisors traditionally equate volatility and risk. Volatility is a clone of uncertainty. According to Joe, people are not afraid of that. Why? Because it deals with the near term. One year results. Most investors have a very long time frame and while they may notice and react to short term results, they intuitively know things will likely work out.
Some will be wrong.
The change they are afraid of, and would address, is the change of lifestyle if the money at retirement is too little or unexpectedly runs out. That fear can be managed but it cannot be ignored. People must know about it and they must organize their affairs in the present to minimize the possibility.
There are three requirements:
- Understand that future investment returns will be volatile and while the average return may work out, the timing and the sequence of events may not attach well to your personal circumstances. There must be a significant margin for error in the rate of return assumption. Knowing that balanced funds have returned x% over 20 years is meaningless for anyone who has no time machine to take them back 20 years. It is especially meaningless if the forward time frame is shorter.
- Review and revise is the best defence. The future is unknowable and the present is almost unknown. The past tends to provide ambiguous instructions. You defend yourself by diversity and vigilance. Try to think of your financial plan as a funnel in time. As the end point comes closer the range of possible outcomes should be narrow. In the beginning, when the range of outcomes can be quite wide, there will be more latitude for investment decisions.
- Try not to think about the dollar count. Dollars are mostly meaningless and confusing. The are merely a convenience for accountants. Money in use has meaning. Try to think in terms of years of cost of living on hand. If you have spontaneous income from government plans and pensions, you need only replace the rest of your need. You could generate assumptions about interest and inflation and estimate your cost of living and then capital needed just falls out. An arithmetic question. Well, assuming you know how long you will live. You probably should have some margin there.
An advisor can help you with the arithmetic and can help with the discipline needed to run a long plan. Do not overlook that value. The price of doing it yourself may well exceed the price of hiring help.
The advisor can only help you if they maintain the position that you do have things to fear and also provide ways to address that risk. An advisor that can talk you in off the ledge every now and then will likely keep you on a track that has hope.
Mistrust an advisor that makes the future look too comfortable. There are now and will continue to be demons out there.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: firstname.lastname@example.org