NFB FINANCIAL UPDATE Volume55 April 2011
FROM THE CEO’s DESK
R
isk is an interesting word. Some would run a mile having simply heard the word. Others are attracted to it like a moth to a light bulb. Most often it evokes emotive and even irrational reactions from individuals and, even more so, from like-minded groups. So, what is risk and which types exist in the current global environment? Risk takes many forms and it is important to assess one's life and work environment in order to understand what these are and how they might affect you. They also come with different probabilities of occurrence and severity. Take the rather catastrophic events of late: these include the Japanese earthquake and subsequent tsunami, the inundation of Australia's eastern coast, Haiti's devastation and, before that, several other regional disasters. What is remarkable is the speed with which the world moves on; almost forgetting these devastating occurrences as they pale into relative insignificance by the next such events and the media overkill they enjoy. Another form of ever present risk in the developing world is social unrest, civil war, crime and other instances where humankind seeks to unlawfully take control of places, resources, etc. Or they simply commit acts which are indefensible and which typically have far reaching consequences, sometimes lasting decades and beyond. Africa and some other parts of the historically branded Third World have poor humanitarian and political records. Ranging from outright genocide to mere one party financial rape of entire countries. This sad history is far too common and is largely ignored where strategic value is not on offer to the developed "Big Guns". Risk, which we at NFB consider every day, are market, credit, currency and similar economic risks. The well written book[1], dealing with outlier events (which are called Black Swans) is so appropriate at present as people try to deal with events and outcomes. Expecting the unexpected has become the norm rather than the exception. Large swings are to be expected as markets sway to the effect of actual and contrived events, rumour and people talking to their books. Another material risk, often neglected in these modern times, is the opposite of some of these horrible scenarios penned above. It is longevity! This risk is one of the greatest challenges to investors and advisors alike. When one could reasonably expect to leave this world at three score and ten; planning for a short retirement made things easy for planners and investors alike. The landscape has changed remarkably and, in First World environs, with healthcare and other
developments, folk are surviving and indeed thriving into their eighties and now nineties with great regularity. Making the correct assumptions and planning financially is a different game. Where one saved for thirty or forty years and survived half or less of this period after retirement is no longer the deal. This challenge, although daunting, is acceptable for younger investors who can invest aggressively and for a long time. For older investors the challenge of lower rates of interest, relatively high tax rates, risky growth markets and high volatility presents an investment backdrop which will challenge even the coolest of characters. Solutions are needed where investors don't back a single horse and certainly not one institutional provider. Balance sheet risk makes diversification very advisable. Splitting assets across types, ranging from pure equity, protected equity, property (particularly where good income from quality leases exist), interest or dividends to provide for income needs and to take advantage of tax allowances, as well as sufficient offshore diversification, is recommended. These must also have taken taxation issues into account as often investors neglect this aspect which can be used rather effectively to optimize net returns. A material, and reasonably predictable risk, is inflation. Much has already been said about the remarkable, repeated and coordinated infusion of liquidity by central banks into distressed capital markets. The US Fed's balance sheet has swollen dramatically as they have created massive liquidity to inject confidence and cash into the global banking system. Europe, the UK and other members of the Club have acted in sync. This bailout will have consequences. Inflation is one of them. Investors can ill afford to completely disregard this ominous prediction. As a result when one retires, moves funds to "safe" investments and draws an income, the outcome is gradual, or worse, capital atrophy. Managing assets to provide risk-adjusted growth and income is optimal. Higher income, dividend or rental generating investments are the most likely to deliver a balance between income and growth. As always, the caveat is sufficiency. Without enough margin of safety, having to plan for growth above necessary income is a plight to be avoided. This might sound trite, but the recurrence of this shortfall is scary. Avoid it at all costs. Mike Estment, CFPÂŽ BA CEO, NFB Financial Services Group [1]
The Black Swan, by Nassim Nicholas Taleb
IN THIS ISSUE From The CEO’s Desk Crystal Ball? A Strong Case for Offshore Equities!
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