Why financial planning works

I was asked recently whether I adhere to an investment master plan. It’s a great question, one that makes you think, “Well, I should, but was the purchase of X, or the sale of Y a sensible move?”

Actually, what makes matters more complicated is the research I do for this blog, my long-running column in the EDP and articles written for several other investment-related publications. It’s often the case that, having researched a company, I set my paperwork to one side with instructions (to myself) to examine it in even further detail at a later date. Accordingly, you can imagine how many bundles of paper, newspaper and magazine extracts, printouts and hand-written notes litter the shelves, and much of the floor, of my office.

Frankly, I need a research team and somewhere near a hundred times more capital than I have in order to take advantage of these opportunities.     

As it transpires, I’ve been mulling over my investment plans for a few months now in an attempt to avoid being reactive, but why should we try to follow a master plan at all?

I suspect it derives from our propensity to save. After all, unless you’re lucky enough to have inherited wealth, it takes a long time to accumulate savings and one has to feel assured that subsequent investments are as thoroughly researched and as potentially rewarding as possible. Hence the messy floor of my office.

Economists maintain that by saving, we abstain from present consumption in order to enjoy greater consumption in the future. Saving, they suggest, is undertaken by families and individuals for a variety of reasons, most of which are linked to future provision.

Although many economists define investment as ‘capital formation’ and maintain it can only be done by businesses, let’s not split hairs. Most of us save not to stuff cash under a mattress, but to make it work for us – or at least we should, especially if it means foregoing current consumption.

My strategy, if I may use such a grand word, is determined by economic conditions and my age – and that of my wife – neither of which are to be revealed here, but take a look at my photo and you’ll get an idea. In around 10-15 years, we’re keen not to retire, but to reduce our working hours, so it’s essential to ensure this planned transfer takes place with the minimum of fuss.   

Over the last few years, I’ve tended to spread our investments broadly between equities, investment trusts, property and precious metals such as gold and silver. These will remain core to our plans and, as the UK property market begins to look a little more attractive, I’m not ruling out any further real estate forays.

Several more investment trusts have caught my eye this past year, thanks mainly to their comparative stability and steady dividend flow. One has raised its dividend every year since 1966 and I like to think it will continue. Trusts benefit from being allowed to retain up to 15% of their income in a revenue reserve; accordingly,  when dividends are abundant, they set cash aside to see them through more difficult times, hence the steady flow.

By contrast, gold may suffer from occasional short term volatility, but I’m prepared to take a long term view, an approach determined largely by a much bigger player in the gold market: China which still plans to move a sizeable proportion of its $1 trillion dollar-denominated reserves into gold.

As strategies go, it’s fairly straight forward, but there is a longer-term aim, set against a balmy, warm backdrop where sunshine is a regular feature. Retiring abroad? That’s a tale for a different blog.

posted on 19 February 2013 12:30 byPJS