Canny view: History can help with financial planning

Even in tough economic environments innovation and wealth creation continues, writes Nick Stewart. Photo / Laura Smith

The number 300 can have all kinds of meanings.

It’s the number of articles we’ve just hit in this column, for example and a great cricket innings.

Mathematically, it’s the sum of two prime numbers and also of 10 consecutive prime numbers. It’s also famously the number of Spartans who, against all odds, held back the masses of the invading Persian army for two days in the Battle of Thermopylae.

Whether you’re a history buff or you’ve just seen the film, there’s no denying the legend of Leonidas and his 300 Spartans live on from this event.

The Persians outnumbered the Greeks hugely, with modern estimates placing them between 120,000 and 300,000 soldiers (it’s hard to nail down absolutes from 480 BC, particularly with some embellishment from ancient authors). The 300 Spartans were part of an allied Greek force estimated at 7000 and may well have kept the Persians at bay for much longer had the opposing force not discovered a way to get behind them and essentially ‘pincer’ the smaller army.

There are some things in this history lesson we can apply to financial planning, and some that might be best left off.

First up: Having courage and staying true to your mission in troubling times. While I don’t recommend going to the extremes of the Spartans for every occasion in life, we can certainly admire their tenacity and quick thinking.

What we may leave in the annals of history, however, is going up against insurmountable forces, and being on the defensive the entire time. While risking it all bought invaluable time for the Greeks in battle, ultimately, they were defeated.

Nick Stewart. Photo / Supplied

They were obviously working with what they could and did an admiral job, if we’re still referencing it in present times. If we’re looking for lessons to take forward in a modern context … you certainly don’t want to create a last-stand situation in your investment portfolio.

Focusing on one narrow pass to concentrate their efforts may have been the best strategy available to the Greek allies, but in the world of investment, we know the opposite to be true. Concentrating all of your efforts in one area is a sure way to lose your investment if, or when, that industry, company, tech, country or fringe new-age asset gets into strife.

What else can we learn?

History (and research) in financial planning tells us the following things:

1.) Stay in your seat. Market timing is essentially gambling your hard-earned money, and if you try to ‘game’ the system you can often end up locking in paper losses by withdrawing from the market before it recovers. There will be ebbs and flows, so you must keep your end destination in mind throughout the journey.

2.) Balanced portfolios have quickly regained losses after past significant declines in the past. A balanced, diversified portfolio has the purpose of distributing your investments over a wider area – so you won’t get stuck in the narrow pass should things go pear-shaped. Since we know markets are volatile and returns are randomised, we can manage risk to some extent by spreading investments over asset type, industry, country.

3.) Recessions are always identified with a lag. And even if there is one, the record shows that markets are often on their way to a recovery by the time the recession is confirmed. That’s another argument for staying disciplined.

4.) While we can take lessons from the past, it is not an absolute promise of the future – for better or worse. Past performance is not indicative of future returns, especially if you’re only looking to the recent past and not the big, globally diversified picture.

5.) In any case, even in tough economic environments innovation and wealth creation continue. Companies still bring together raw materials, technology, labour, intellectual and financial capital to develop new products and services that create wealth for shareholders. Governments and companies still need to raise funding in bond markets to deliver services and build long-term infrastructure. Investors who participate in bond and equity markets have an opportunity to share in the wealth created while financing those developments.

6.) Finally, a well-constructed financial plan will make allowances for periods like the present. The right plan will help you see past the daily news headlines so you can stick it out to get to the good times on the other side. Uncertainty is a constant. But if there were no uncertainty, there would be no return. And while the good times don’t last forever, neither do the bad.

Tolstoy wrote in War and Peace, “The two most powerful warriors are patience and time.” This is true in battle, as in life, as in financial planning; patience and time will be your greatest assets.

The patience to ride the ups and downs of the market, and trust in your plan.

The fullness of time to benefit from these corrections and capture the highs with the lows.

If you’re seeking a second opinion on your financial plan or want some advice on where to start, sitting down with a trusted fiduciary to discuss your unique situation is a good first step. Look for fees-only, independent financial advisers who have your best interests in mind.

To end, I would like to thank our readers; 300 is nothing to sniff at, in history or in article-writing tenure. Thank you to those who email or call to chat about the latest editions, those who have found value in it, and to those who may be reading this for the first time.

Patience, and time: I’ll see you next week, the week after, and at our next milestone. Ngā mihi.

· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke’s Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 300.

· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz