“Bulletproof Investing”?

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This catchy title of a book by Ben Stein and Phil DeMuth is full of bullet points and some silver bullets for investing.

Coming soon after the financial debacle of 2008-2009, the book is riveting not just for Americans.

To quote part of the introduction: “If we do nothing more than follow the dictates of our heart and our culture, it will lead us to financial ruin.”

As young people we spend every dollar plus whatever we can put on Visa to buy clothes, cars, cocktails, vacations, dinners and entertainment. Our pocket book is small but our wants are great. Why shouldn’t we have it all?

Then, as middle-agers, our wages increase but our needs expand even faster. We need McMansions and sports utility vehicles. We need designer furniture. We need to send our kids to private schools. We need significant, broadening travel. We also may have to kick in to support our own ageing parents.

By the time we retire, the piggy bank is empty.”

The first “problem” is how to invest our money so that it grows over time. Without long-term compounding of our investment returns, our savings will never grow enough to finance our long-term goals.

Jeremy Seigel’s classic “Stocks For The Long Run” examines US stock market performance from 1801 to 2001 and concludes that, after inflation, stocks have returned almost 7 per cent per year over this period.

But it does not work out. We invest for the long run but we still have to eat every day. J.M. Keynes said that in the long run we are all dead.

The investor’s paradox:

We need the maximum return we can get from our investment dollar in order to compound the giant sums of money required to support us through our retirement. However, if we go for the big returns, we inevitably risk taking a big hit that substantially wipes out our savings. On the other hand, if we forgo the high returns by avoiding stocks, our nest egg never grows. We need to find a better way of getting the returns we need without the risk that will destroy our savings before we get there.

But:

i) We have no control over the future direction of the stock market

ii) We have no control over the future direction of interest rates

iii) We have no control over the business cycle on the economy

iv) We have no control over the competition

We can only control the strategy.

We have to ensure it works for our long term good.

Longevity is a good problem to have, but it isn’t cheap. A lifetime’s savings need to last 30 to 40 years.

Firstly, we must know our “investor psychology”. Secondly, we must work out a specific investing programme which limits the downside risks and maximises our income and savings.

The best way is to seek good advice and good advisers. Unless we have the financial savvy and the time, it is better to pick specialists who have integrity and our interests at heart.

Pick advisers with experience too and the wide range of services and products at their disposal, not those who have limited experience and are tied to one firm whether it be an insurer, a bank or stockbroker.

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