Finance

THE JARS STRATEGY

Andrew Fort B.A. (Econ.) CFPcm Chartered MCSI APFS, Certified and Chartered Financial Planner, Fort Financial Planning

To invest successfully over a lifetime does not require a stratospheric IQ,’ says Warren Buffett. ‘What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.’

Having identified where you want to be at some point in the future and setting your financial goals, a real financial planner is able to help you calculate the return that is required on your investments and, indeed, the amount that you need to save to reach the goal. Your appetite for risk may be different. A major part of financial planning is reconciling the differences between the risk required and the risk desired. Sometimes it might be necessary to delay the goal to accommodate a desire for less risk when investing.

A vital part of building a financial plan that will deliver success is to identify each person’s ability to cope with financial shocks. The world of investing is inherently unpredictable. Stock market returns are not linear. It is important to understand not just the long-term reward for taking risk but also to fully comprehend the inevitable periods of poor performance. It is also important to understand that taking no risk, leaving all of your money in cash, is likely to mean that your capital will not keep pace with inflation.

At FFP the ‘sound intellectual framework for making decisions’ is what we call The Jars Strategy. Very simply put, we help people to identify how much money they need in short-, medium- and long-term jars. The short- and medium-term jars are held in safe assets such as cash and government bonds. While they deliver comparatively low returns they ensure that money is readily available when it is likely to be needed. Having identified how much needs to be held in cash, for the short-term, and bonds for the medium-term, anything that is left over is money that is not needed for the long-term. The amounts to be held in each jar may change from one year to the next. For example, if you wanted to buy a car in 18 months’ time the money should have been moved out of the long-term jar ahead of it being needed.

The Jars Strategy also helps ‘to keep emotions from corroding that framework’. The study of psychology tells us that we are our own worst enemies. When stock markets are booming people tend to take on more risk than they need or desire. When stock markets are tumbling people tend to panic and take on less risk. The Jars Strategy helps people stick to the long-term plan rather than reacting to short-term bad news.

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