Investment planning: What do I do?

There are several other forms of this saying, featuring different foodstuffs and different animals, the earliest of which appeared as far back as 1678. Obviously, people have long noted that there is more than one way to do anything. I am sure the debate about investing goes back just as far, if not even further.

It would be so much easier for us to plan if only we knew how long we would live. Life expectancy is rising and the baby boomers are stubbornly staying alive, leaving the financial planning industry with a few challenges.

Three of them are:

• Investors don’t know what they want and are almost invariably unhappy with what they get;

• People who have lost money in the past, or who don’t have enough money to fund their lifestyles, are inclined to adopt a ‘double or quits’ mentality; and

• People’s reserves are becoming depleted before they pass on.

There are no simple solutions. In fact, one of the investment planning industry’s challenges has always been to try to make its processes and approach understandable to the general public.

The first step might be to contract in the Chinese way. According to Dan Harris, a lawyer at Harris & Moure specialising in Chinese contracts, when contracting the Chinese way you have to describe the working relationship at a given point in time, not a hard-and-fast set of deliverables. If circumstances change, the Chinese expect their partners to adapt with them. Obviously, everybody has to understand what is being contracted.

This could work well for financial advisers and their clients. Advisers should do everything possible to find out how the client behaves when things go wrong and what returns the client expects.

When it comes to returns, there are simple mathematical guidelines. If you can only take the pain of losses of less than 5%, don’t expect a return of more than inflation plus 3%. However, if you are prepared to take the pain of losses of less than 17,5%, you have a good probability of achieving CPI plus 8%.

The second element that needs to be discussed is the ‘life expectancy’ of capital, which is affected by the starting capital, inflation and returns over time on the amount of capital remaining at each point in time. The life stages model might not be the ideal solution for all people.

Peter is 60 years old and wishes to retire with R1,5m. He needs an income of R11 000 per month that will increase in step with inflation each year. How long will his money last?

At a return of inflation plus 2%, his capital will be depleted at age 73. With inflation plus 4%, his capital will be depleted at age 75. With inflation plus 6%, his capital will be depleted at age 79. Inflation plus 8% will see his capital depleted at the age of 90.

However, Peter is comfortable with losses of less than 5%. The age of 73 or 75 is not that far off for him, so he is in severe danger of outliving his retirement savings. Adjustments have to be made to bring him closer to being able to afford to live until 90 or older.

It is important for the investor, the financial adviser and the asset manager to contract within a specific framework to avoid conflict. If something goes wrong, who is responsible?

One thing is sure – the investor is the one who will have to deal with the consequences. Ignorance is bliss until it causes pain.