Fatal distraction

The Nobel Prize in economics was awarded in October and, true to form, provided anyone with a passing interest in trivial absurdity with much to savour. Apparently, the complete failure of neoclassical economics during the recent financial crisis (which, incidentally, will define our age) is not enough to dissuade the Royal Swedish Academy of Sciences from celebrating the (in)ability of economists to predict the long-run movement of asset prices.

It is not stretching things to summarise the prizes as a pat on the back for economists who argue that financial markets are efficient (Eugene F Fama), except when they are not (Robert J Shiller).

For me, the prizes highlighted my long-held contention that understanding this stuff is hard, and for private investors, often futile. It is difficult to know with confidence when financial markets are efficiently generating wealth and providing economic stability, and when they are an interconnected cabal of casinos destabilising the global economy.

The good news is that, when it comes to your own lifestyle financial planning, the best approach to most economic theory and financial markets commentary is to: put your fingers in your ears, close your eyes and repeat 'la, la, la, la, la' until tired.

When you have done this, your mind should be clear enough so you can focus on the endogenous, not the exogenous:

• What lifestyle do you want for yourself and your family?

• When can you stop doing what you don't enjoy?

• What resources do you have?

• What resources are you likely to have?

• How much is enough?

• Are you on track?

All you have to do then is keep it simple, reduce risks and manage costs. Review everything at least annually, and be held accountable.

Shiny happy people

The whole financial services industry is geared up to make you think things are complicated and therefore warrant a solution detailed in a shiny brochure, normally with a hysterically happy couple on the cover in a park with two children and a dog. Views are then exchanged by financial journalists who frequently rely on advertising revenue from the providers of said solutions. It is hardly surprising that when I initially work with clients, they are prone to focusing on the external.

The following questions and statements have cropped up over the years, directly or indirectly, in response to the above bullet points:

• It all depends on inflation over the next 20 years.

• Is it a good time to buy gold?

• I don't get my work pension until I'm 65 so it doesn't matter what I want.

• What is better over ten years: property or shares?

• It depends on what Mum leaves for me in her will.

• I want to wait until the eurozone crisis is resolved before I think about that.

• I want to put all my investments in Russia because the Olympics will boost GDP there.

• If we can release equity from this place when we downsize, that's the key to everything.

One investor, whom I met in 2008, did not want to think about his long-term future until after 2012 "in case the Mayans are right".

Now, I'm not saying that these aren't important or relevant considerations for the individuals who posited them, but in no way can any individual have meaningful control over the issues that they articulate. More importantly, they are white noise compared to what really matters: can you live the life you want without fear of running out of money - whatever happens?

Whether economists, investment house sales managers or private investors, most people I have met who spend their time formulating an opinion on future investment movements have neglected to define the lifestyle they want to secure with the fruits of their endeavours.

 

Steven Hennessy is a chartered financial planner and associate director at Myers Davison Ginger

He writes a regular blog about behavioural finance for Private Client Adviser