When it is done right, long-term investing is always seamlessly aligned with your lifetime goals and those of your family. There is a perfect integrity about purpose-driven investing. It is an appropriate means to a healthy end: financial peace in the current generation and important legacies to the generations which follow.
For as long as the investment portfolio remains the servant of the financial plan, harmony reigns.
Our problem as humans is that we can be our own worst enemy. Being human, we begin to listen to the shrieking voices and ‘noise’ of the News headlines, ‘the markets’, TV ‘gurus’ and Bloomberg, who (inaccurately) insist directly or by implication: “You can beat the market. You should try to beat the market. You don’t have to rely on personal initiative, hard work and thrift. You don’t have to be bound by faith, patience and discipline. You can find much more lucrative strategies than asset allocation, diversification and rebalancing. You can out-perform!”. Codswallop.
When we are tempted by and then succumb to the “out-performance” drug, the focus of our portfolio moves from our financial goals to the markets themselves. It is at that point that we commit the mother of all mistakes. For when we give into that temptation, every return destroying, behavioural proclivity to which human nature is prone, comes rushing into our financial and our emotional life.
We then do all manner of wrong things, for the wrong reasons at the wrong times, and repeat this downward spiral until we have blown up our investment plan entirely. For at this point, there is a fatal separation: the end of the connection between the investment portfolio and life goals.
Our goal is always to help you maintain this connection between your investments and your goals and, if you should break it, to encourage you to restore it.
Temptation is everywhere: most of the population gets a lot of financial input from electronic and print journalism. All journalism proceeds from the toxic assumption that you should be trying to “beat the market”; that you should select investments with the highest historic returns; that you should try to time your entrances into and exits from the market; that you should switch asset classes, funds, market sectors and even countries in an opportunistic way.
This is not only a form of madness, but it is a seductive madness, because like all systematic delusions, once you accept its false and dangerous premise, it seems to have a compelling logic to it: that the guiding principle of portfolio management is (and ought to be) all about “outperformance”.
However, it is an evidence-based truth that consistent out-performance through active selection and timing is impossible. Putting that fact to one side, that’s not even the final point: in the context of proper purpose-driven investing, it is also irrelevant.
Why? Because the critical issue is that “outperformance” is not a financial goal.
A financial goal is an income we don’t outlive in a two-person, three-decade retirement full of dignity and independence. Meaningful legacies delivered in tax efficient ways are goals. The ability to be of financial assistance to our children in the education of their children: surely, these are financial goals. Whatever we put on your GL Passport are, of course, proper financial goals.
Purpose-driven investment is to begin with the end in mind as to the timing and cost of these goals and then reason backwards into an appropriately diversified investment portfolio strategy making some realistic and researched assumptions about inflation and rates of investment return against which we can track its progress.
Even more important, we work out how much money to put away each year or invest as a lump sum now.
While we can and should work out how much money is needed, we cannot project relative “outperformance” into the achievement of your goals. The performance of the portfolio relative to the market tells us nothing about the amounts of money you need to invest over time because relative performance is an abstraction and everything that a real long-term plan is not.
Goal-focused, purpose-driven investment gives you, the investor, a basis to act on a firm footing of proper long-term company valuations and you can only act your way to financial peace.
Market-focused investment is an oxymoron because it is not an investment; it is short-term speculation on price movements. It leaves you to react to the fads and fears of the moment. You can never react your way to financial peace or decent returns.
On top of the other mistakes, the effect of chasing elusive consistent “outperformance” is to increase portfolio turnover and diminish returns thereby. Whereas goal-based portfolios experience low turnover unless and until goals change – which may not be for a long time. This means that just by lower turnover alone, such portfolios will experience a better rate of return with less effort and cost (literally).
The essential characteristic of a successful investment portfolio is that it is appropriate to your deeply held life goals.
And, having built such a portfolio, the best course of action is to display the qualities of faith, patience and discipline which can see you through the journey to a genuinely successful life outcome whether “by land; by sea or by air”.
This is how you avoid the fallacy of “outperformance” and have a portfolio which has the highest probability of achieving your goals and maintaining its purchasing power for the reasons that are important to you.
I commend this philosophy to you.
If this approach resonates with you, we’d love to help you make a start on your journey. Just give us a call, drop us an email or pop in and we’ll facilitate your tailored GL Passport as your first step, with our compliments.
We hope that our occasional updates provide you with some valuable content and food for thought. Keep tuning in!
Until the next time, let me leave you with this quotation:
“My favourite holding period is forever.” ― Warren Buffett
Certified Financial Planner™ professional
Chartered Wealth Manager™
Investors should remember that the value of investments, and the income from them, can go down as well as up. This update has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for everyone.