A time to let go…and a time to hold on tight

Heading out to take my 17 year old to a final driving lesson before sitting for his P-Plates, I am again struck by the leaps of faith we parents have to take with our children, at all stages of their lives. Sometimes small leaps and sometimes enormous ones, as we release them from our warm loving hearths into that wonderful, exciting and often very unsafe world that awaits them.

With our son, we have dutifully driven with him and coached him through the interminable 120 hours required for him to attain his driver’s license – the hours initially seemed a chore and as they mounted and ultimately drew to an end, I came to recognise the gift of having this time captive with my soon to be released teenager. When my right leg wasn’t stabbing with terror into the passenger foot well, or I wasn’t distracted by the continual compunction to turn down the volume of the radio featuring some obscenely worded rap song, I have had the chance to actually talk. Often the response was not much more than a grunt of acknowledgement, but occasionally I was rewarded with a rare gem - conversation. And it has now come to an end.

As the day of the license has drawn nearer the excitement of impending freedom has become palpable. Exhilarating for him and very daunting for us. But I know it is necessary and part of the process of parenting and the step by tortuous step of letting go.

So what has this to do with matters financial? Everything and nothing – in short, the opposite applies. Letting go is disastrous when it comes to our finances. Just when we’ve completed our filing, mountains of additional paperwork and bills have piled up demanding our attention. Just when we have virtuously submitted our tax return, another year-end rolls past, ceaselessly, unendingly, unsympathetically. Just when we become complacent with our portfolio’s inflation beating returns, the stock market plummets again, beginning another succession of anxiety, uncertainty and rebuilding of our asset base. It is an endless cycle that we cannot escape, and unfortunately for us, nor should we. We cannot let our attention lapse, pass it on to another and become passive. That’s when as Yeats predicted in The Second Coming: “Things fall apart, the centre cannot hold…” In our quest for individual financial security we owe it to ourselves to remain eternally vigilant.

Dramatic yes, but it holds true. Get yourself a good financial planner and take it on the chin. Just as our children mature, our financial knowledge too develops and we become more comfortable with our state of affairs. We begin to understand volatility, long-term returns and to manage our emotions around markets and their erratic behaviour. Conquering our fear is the common theme here – achieving the fulfillment of stepping outside our comfort zone, and taking control of our tomorrow. Just as our children will take of theirs. That, we have to trust.

The wild ride we have to have

The incessant yo-yoing of sharemarkets is compelling all but the most intrepid of investors to the sidelines in the hope of avoiding the ensuing collateral damage to their portfolios. If it weren’t so damaging it would be fascinating the way fear and uncertainty trigger such wild swings – rational? Methinks not. The wise maxim “It’s not timing the market but time in the market” rings hollow in these times, as heading in at the wrong time of the cycle can result in years to a break even position, let alone earning a decent return on your money.

Again one wonders - with inflation running at under 3% and term deposit rates available at over 5%, why should we take any investment risk at all? Surely if we beat inflation and the taxman, we’ll be right?

Unfortunately, as a recent article in the Sydney Morning Herald proclaimed, those very cash devouring elements, inflation and tax, mean we end up with the most paltry of earnings on our savings (just $39 on $5,000 savings for someone on 31.5% marginal rate, and declining). Without tax incentives to save, it is not attractive at all. You can see why some people throw in the towel and rather spend their hard earned cash on a great pair of heels or a weekend away! But no, we have other options. Like how about the fully franked yield of 9 to 10% offered by some of Australia’s finest blue chips? But then we’re back to the roller coaster…

Another problem is this - the inflation rate released by the ABS represents the price increase of a basket of goods and services purchased by the “average” Australian household. That’s the rub – which one of us is “average”? Every age and stage of our lives yields different weights of the goodies in our personal baskets, and may skew our personal inflation rate higher (sometimes lower?) than average. If you have kids at private schools, you can only dream of an annual increase in fees limited to the rate of inflation. In reality it’s more like double that. As people grow older, their spending on items such as pharmaceuticals and healthcare services increases out of proportion with the “average”. The items that tend to pull the average down: technology, telecommunication, air travel and motor vehicles are often not the sort of things consumed by senior citizens.

And that is why even in the most conservative of portfolios, we financial advisers generally advocate a small element of “growth” assets, to counter that most uncertain risk of all – longevity risk. Longevity risk is a strange concept but all too common an outcome – the risk of outliving your capital. With inflation eating away at the buying power of our dollars, we do need to take some risk with part of our cash to go for growth and higher yields – so hold on tight, here we go!