Warren Buffet – the well known and high profile investor and long servicing owner and CEO of Berkshire Hathaway Inc once quotes as saying “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
Clients often don’t have a target in mind. But they do then agree with our starting point when investing for growth over time. They wish to be no worse off than they were before. We then work with them to help further identify where they wish to be at some point in the future and help set financial goals. Once those goals are identified a real financial planner is there to help you reach those goals.
Your appetite for risk may be different than what it needs to be to meet expectations. A major part of financial planning is squaring the differences between the risk required and the preferred risk. If these don’t match then it may be necessary to delay the goal to accommodate a desire for less risk when investing.
A vital part of building a financial plan that will deliver successfully in time is to identify each potential client’s ability to cope with money market movements and financial shocks. On a daily basis the world of investing is inherently unpredictable and market returns are definitely not linear. It is important to understand not just the long term rewards for taking risk but also to fully comprehend the inevitable periods of poorer performance. It is also important to understand that taking no risk and leaving all of your money in cash is likely to mean that your capital will not keep pace with inflation. We have all read and heard over the last 6-9 months about the expanding impact of inflation.
When the sage of Omaha refers to the ‘sound intellectual framework for making decisions’ we attempt to help clients understand the processes by looking at the simple use of Lifestyle Pots or Jars. We help people to identify how much money or assets they need in their short, medium and long term pots. The short and medium term pots are traditionally held in less volatile assets such as money market deposits, cash, government bonds. These pots will historically produce lower returns (with less volatility) than equities and ensure that money is more likely to be readily available when needed. Money not required in short term is placed into the long term pot. Each client is different and the Pots are very unlikely to be filled equally. Periodically the requirements for each pot can be amended, for example a child may inform you they are getting married in 20 months and so you can move some of the money in the longer term pot to the medium or short term pot.
When I was growing up my parents has different physical tins in the cupboard for the housekeeping, food, utilities, the milk man and so on. The principle for our Pots strategy is no different, separating out differing requirements and differing needs over differing timescales.
Using the Pots Tactic also helps clients concentrate on their lifestyle and less time on shorter term market fluctuations. When stock markets fall amateur investors will sell out early and when they are thriving for longer periods investors often take more risk than they need. We all know that we shouldn’t make knee jerk reactions to the latest newspaper headline and the Pots plan helps to keep investor ’emotions from corroding that framework’.
Lee Hinton is an Associate Member of the Chartered Institute of Securities and Investments, holds the Cyprus Ministry of Finance Advanced Examination certificate and holds the UK Diploma in Financial Planning.
