Personal-Finance

Why you shouldn’t treat your savings plan like a bet on the Fifa World Cup

2018-06-22 14:55

The Fifa World Cup is upon us once more, a mixed blessing for those who are emotionally invested in the outcome. As nails are bitten, sleep is lost and seismic events are recorded in Mexico City perhaps it is a good time to remind ourselves that while emotional exuberance, hysteria even, seems perfectly acceptable, it is just a game.

It has been widely reported that when Mexican forward Hirving Lozano scored the country’s winning goal against Germany, the reigning champions, in their first-round match, at least two seismic sensors detected a minor earthquake in Mexico City.

On an individual level, emotion can be powerful; en masse it’s shocking.

Emotion has the power to make humans believe something despite loads of evidence proving the opposite.

Once we are tethered to beliefs they are hard to shake, even in the face of evidence to the contrary. That’s okay when we are talking football, because in the end, it is just a game, 11 against 11. The outcomes don’t matter in the great scheme of things. It is “the most important irrelevance in the world”, as the Germans say.

Some people want an African country to win at last, others want to watch great matches and care little about the outcomes, yet others think life will not be worth living if their national team doesn’t make it to the last 16. We all have different hopes and dreams, mostly driven by irrational exuberance. As I said earlier, it is just a game.

When it comes to many of the important questions in modern life – diet, governance, living with dignity in old age, for example – we should be a bit more circumspect and thoughtful. In such areas as planning for retirement, unexpected losses, own goals and so on can be absolutely disastrous. It is perfectly fine to be a fun-loving fantasist as a sports fan but in other parts of life it is better to follow well-trodden paths marked out by logic and sign-posted by evidence.

At the end of the day, when it comes to saving for retirement, everyone wants the same thing: a pension that will preserve their lifestyle into old age. That is the goal; anything more is a bonus, anything less a potential calamity. In these cases outcomes do matter, they often have lifelong consequences, they can even determine survival.

This is why we can’t leave these choices entirely subject to biases and emotional responses, which can be the perfectly justifiable basis for supporting any sports team you like ... especially when your own country’s failure to qualify has robbed you of the obvious choice.

Imagine if scientists or investment advisors acted the way fans continue to over the 1966 “Wembley goal” controversy. England and Germany were balanced on a knife-edge at 2-all in extra time in the final match of the competition when a shot from England’s Geoff Hurst struck the cross bar, hit the ground and bounced back into play, to be cleared by a defender.

The question people still ask is: Did the ball cross the goal line?

The answer depends on who you ask. All of England saw it, clear as day, bouncing behind the line; most others did not.

Surely, if the whole of the ball had crossed the line (the basic definition of a goal) it would not have thrown up all that chalk dust, not on a wet pitch, people asked (in the Queen’s own English). Even John McEnroe would agree with that.

But on the day in question, the referee asked the linesman, Tofiq Bahramov, a Soviet footballer and referee from Azerbaijan, who is often incorrectly referred to as “the Russian linesman”.

Bahramov, who had initially hinted at a corner kick, said yes. The goal was awarded. The fact that England went on to score another goal is neither here nor there since that one disputed goal is widely seen as the turning point in that game, which England won.

Each new World Cup rekindles the debate, always with the same dearth of objectivity.

Modern studies using film analysis and computer simulation have “proved” that the ball never crossed the line, even a 1996 Oxford study “proved conclusively” that the ball was far from being a goal.

Still, ask any Englishman or woman …

Much more worrying is how many people in the investment world believe theories that have been proved wrong over and again by research and experience.

Many highly educated people vigorously defend views that align with their indoctrination and pay-cheques, even if that is at odds with the evidence or logic.

Investment “experts” behaving like football fans? It is worrying indeed.

Of course there’s plenty to argue about in the investment industry. Some days it seems the only thing missing is a red card and the distant strains of a vuvuzela.

There’s the question of active versus passive management, the role of financial advisors, whether they should charge flat fees or use a commission-based model, the merits of investment choice and of performance fees, or choosing between an RA or a unit trust, or between ETFs and unit trusts for that matter.

So how can we avoid own goals when it comes to saving for retirement?

Well, looking at the facts rather than listening to emotionally charged beliefs would be a good place to start.

Which options give me the highest probability of meeting my goal? And which introduce risks that decrease this probability?

Beliefs, often invoking an emotional response not supported by evidence, can make even the smallest probability seem likely.

Investing 15% of your income for 40 years in a high equity portfolio is a good start.

Saving more adds a margin of safety, should the markets’ historical returns not repeat. We have no guarantee they will. But one aspect of the future investment return is certain: the extent to which it will be reduced by fees. So it makes sense to keep these as low as possible – this will improve the investor return, no matter what markets deliver in future. We can all agree on that.

We can also agree that index funds on the whole charge less than active managers, without delivering inferior returns. One might argue that some active managers will do better sometimes, but the percentage has been very low. Nor do we know which funds will outperform. Just like no one knew that underdogs, Mexico, would win against Germany. Paying up for active management is a gamble that penalises the average investor with a below-average return.

It’s best avoided by long-term investors.

This World Cup has goal line technology and VAR (video assistant referee). We can hope for fewer refereeing controversies, certainly on the question of whether the ball has crossed the line or not.

But sometimes even 100 replays won’t distinguish between a foul and a dive, so heated debates will remain part of the game.

But we can agree that these have no place in retirement investing, especially since the truth is self-evident.

The World Cup offers a chance of redemption every four years, but you retire only once. Let’s make this a sober, dispassionate, goal-driven process that follows the safest route.

That route will almost certainly take in retirement funds and low-cost indexing and skip commission charges and ETFs. It may not offer the excitement of an active funds festival on a LISP, but when it comes to retirement investing, only the outcome should matter, not the experience.

Eddy is a senior investment analyst at 10X Investment

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November 18 2018