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April’s letter went out just before my stand up spot at Jim Mellon’s London Master Investor Day on the 23rd.  I’m relieved to say “The Ibiza Mix” went down well.  Lots of interest, a few laughs thank goodness and some good feedback.

Sadists recommended I make the video of my routine available despite the fact it’s 27 minutes long.  So if the techie gremlins keep away it should be attached to this Letter from Linlithgow.  Other colleagues assure me however most folks lose interest in video after a maximum of 5 mins (especially if it features me) so we are looking into slicing it up for our website, www.alansteel.com.  My final slide on the day contained four key things I felt was invaluable if attendees desired true financial independence over the long haul –

Broccoli and Chocolate, Nullius in Verba, The Rule of 72, and Coached Teams.

Have you noticed life flies by at an increasing rate?  Thora Hird the comedy actress said “when I was 45 I went into the kitchen to make a cup of tea and when I came out to my horror I discovered I was 65”…  Been there done it got the T shirt!

A survey this year found more than 50% of Americans face a retirement income of around $4000 a year, or put another way, less than $350 a month to live on.  Jeezo.  Another recent study finds that as we age cognitive declines are inevitable.  (A fancy way of saying we get left behind).  Researchers confirm this decline extends into financial literacy.

What’s even worse is the study also found that as we age we retain self-confidence which together to our decline in financial literacy leads to significant mistakes when making investment decisions.  Here’s what the author of the report had to say ….

“Mixing declines of financial literacy with increases in self confidence is a toxic combination.  It opens the door for honest mistakes as well as fraud.  It’s widely known older adults are common victims of financial fraud.  It’s important as we age we find someone who has our best interests in mind when managing our finances.”  Well said.

Broccoli and Chocolate is our way of reminding folk there’s a choice they need to make in life as early as possible, the earlier the better.  Let’s face it, we all know Broccoli’s better for us in the long run.  But hey chocolate’s more fun.  (Let’s have that third holiday this year, plenty of time to start saving).

Because most folks rely on media headlines for financial “advice” and as we age, increasingly so thanks to our “old brain” panic button (explained in the speech), we’re constantly put off our Broccoli plan reverting to Chocolate fixes that damage our long term plans.  Nullius in Verba, roughly translated as “don’t take their word for it check for yourself”……., the motto of the Royal Society formed in 1660, reminds us to ignore constant bad news headlines, sticking instead to our disciplined plans.

Since 1984 Dalbar has recorded the investment returns of US private investors and compared them to the S&P 500 Index.  Consistently, even over 10 and 20 year periods, the average investor underperforms the Index by between 4% and 6% a year.  So as the Index has produced 9.5% a year over the long term, they’ve received as little as 3.5% a year.

Why the gap?  Dalbar believe it’s mainly down to the fact most investors buy at highs and panic sell after market falls.  Thanks to another toxic combination, our Amygdala (old brain panic button) reacting to bad news headlines.  The Rule of 72 is an invaluable barometer.  For example 9.5 into 72 means steady eddy investors double their wealth every 7.5 years while 3.5% returns double your wealth after 20 years.  Much worse of course are the returns of folks so scared by headlines they leave their savings in deposits.

Clients will be aware of our belief in finding the best fund managers to manage your savings….our fantasy football team analogy.  Barcelona as a team is our barometer.  Barcelona scores goals for fun but they still have a great defence.  But even the best players need coaches.  The best coaches aren’t cheap.  Broccoli’s about setting goals.  The Rule of 72 is about measuring performance.  A great team with a top coach is about scoring goals and stopping own goals year after year.  Like Barcelona.

Despite facts confirming that backing the best works in practice, the media prefer the theory that cheap Passive Index Trackers are superior.  Have you noticed the words Passive and Passion share the first 5 letters?  But the last 2 letters make the world of difference.  What in life would we prefer….be passive or have passion?

Former US Secretary of State Colin Powell said “The secret of success is easy – Preparation, Hard Work and Learning from Failure.”  Passion not passive.  Robin Geffen said “Investing in passive index trackers is like driving along a road you’ve never been on before by looking only in the rear view mirror.”

The report I mentioned earlier about older investors making mistakes concluded “It’s important to find an adviser who has your best interests at heart and investors should expect to pay for good advice.  It will save them thousands in the long run.”

Let me share a story showing the benefits of Broccoli and Goals.  In 1982 an old friend nearing retirement - savings all in banks, came for advice.  He and his wife are in their mid-nineties now.  Their net income today is more than they need, their capital has grown steadily too, well above inflation.  Despite encountering half a dozen “ends of the world” their invested wealth is more than double the value of their home today.  Broccoli and Goals work.  Ask him.

Alansteel
Author
Alan Steel
Chairman
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

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