The financial services industry thrives in making simple things complex. This allows it to charge for solving the problems it creates. The biggest area where this happens is in asset management, where managers promise to outperform the market and deliver high returns. Their marketing divisions do an unbelievable job of manufacturing glossies and graphs which support these claims. We call this financial porn.
The simple truth is that over the last 30 years, 90% of actively managed funds in the US underperformed the S&P500. EINA!
With all this misinformation around, where does the person on the street turn when looking to save for future goals or invest for retirement and in retirement? The answer is found by asking ourselves why are we investing in the first place?
Inflation is the silent killer that erodes the spending power of our RANDS. We see this in the rise in the cost of everyday necessities, like fuel and basic foodstuffs. We also know that the only investment that protects against inflation is Equities (the stock market/great companies of the world).
The outperformance of inflation over time is known as a “real return”. This is what investors should be focused on. Sadly, very few asset managers or advisers speak about this as it is far less “sexy” and doesn’t suit their end goal of charging exorbitant fees.
Understanding what real return one needs over time is vital to the success of your financial planning. If the focus is simply getting the best return, then your focus lies in the wrong area, and I would guess you don’t have a plan.
On entering retirement, this becomes even more important as we move from saving to spending, and whatever we have in our savings pot needs to last longer than we do. Today many people are retired for longer than they worked; 30-40 years is a lifetime.
The idea that we automatically de-risk our savings and investments by moving into conservative funds as we approach retirement is criminal as it has nothing to do with what we might actually need but gives false comfort. The problem with this is that we only realise this when it is too late.
Understanding what real return one needs is the key to a healthy and sound financial plan and a well-lived life. If your adviser isn’t using this in your financial planning, ask them why not?