When all else fails – keep on working!

broken ipad

Jeroen Wilbronk is a really good bloke, but I always end up disagreeing with him. He’s one of these smart-arse markets people who has an answer for everytyhing!

I’ve known him a few years and have always envied his sunny disposition, his good looks and his blissful lifestyle.

My auarrels with Jeroen, like my quarrels with another friend Robert Gardner is that they trust the market and market theory too much! Sometimes, they talk of diversification and asset matching as Homer Simpson talks of doughnuts

Is there nothing in this world that a doughnut cannot do?

So when Jeroen published a blog about how to avoid market failure and illustrated it by his personal failure to insure his son’s ipod, I felt some satisfaction. I hope Jeroen doesn’t mind, but I’m printing his story in full.

This year, Christmas dinner at the Wilbrink family was a relatively quiet, subdued affair. Thanks to Steve Jobs and his crazy inventions. During the various courses grandma Wilbrink was serving up, all three grandchildren were engrossed in their iPhones, iPads or iPods, texting, gaming or watching Christmas turkey’s explode in gruesome YouTube video’s (#link removed by moderator#).

Everybody commented how impeccably behaved my three children were, sitting nicely in a row on the sofa, waiting for starters to be served. While I was worrying whether I had packed enough chargers to last us the night, I heard a loud crack. As we all turned around to face my head-phoned offspring, the youngest was leaning over the side of the sofa looking down at what had been his brothers iPad.

Like buttered toast, it had decided to fall upside down, flat onto the stone floor, smashing the screen with thousands of tiny little cracks. After realizing the damage he had caused, and remembering his brother’s reaction when the same thing happened less than 12 months ago with an old iPod, my youngest burst into tears.

The whole Wilbrink family came to his aid, comforting him that it could be fixed and that it would be covered by insurance. Apparently everyone in the family had had a similar accident with their Apple toys and had their policies refund the repairs. Anyway, the little man made ample use of the attention, excusing himself from eating the Brussels sprouts and asking for second helpings of ice-cream instead.

Two days later I found out that our particular insurance didn’t cover such repairs and that the repair itself turned out to be as expensive as a secondhand iPad from e-Bay. Last year, in my haste to take out a new home/contents insurance policy the only conditions I had were the monthly bills, assuming all insurance must be equal. I clearly fell into the Penny wise, Pound foolish-trap, not considering the “opportunity costs” of not choosing an insurance cover more suitable for a family of three riotous children and a clumsy, accident-prone dad (I now have only 9 fingers with a finger print after cutting my finger cooking on New Year’s eve and losing the top completely the next day playing rugby!).

I should know better; Over the last couple of months, whenever a pension fund cites costs as a reason for disinvesting from active investment strategies, or hedge funds or private equity, I throw my hands in the air and moan to all my colleagues “but what about the opportunity costs of not being invested!?”.

Less diversification in managers, strategies or asset classes, increases risk no matter how you look at it. And although the resulting portfolio may be cheap, it may therefore not be the best balanced.

Stocks and bonds have done phenomenally well since the credit crisis. Obviously, some of that performance is simply catching up to levels prior to 2008. But many asset classes traditionally considered to be more risky, have had performances that weren’t as stellar. Obviously investors start wondering why they pay those high fees, while a simple passive portfolio of S&P stocks would have knocked the lights out!

With insurance contracts, as long as you don’t make claims, costs are just that; costs. But the fact that you don’t claim, doesn’t make the insurance irrelevant. Look at car insurance. Whether you have third party cover, no insurance at all, or whether you have the full package makes a huge difference when you do have an accident and the costs savings achieved will pale in comparison to the total costs.

Diversifying your portfolio over managers, strategies and asset classes is the same as buying insurance, and when markets have gone one direction only, don’t kid yourself you don’t need it. Many hedge fund portfolio’s had single digit losses during the credit crisis and some strategies displayed phenomenal returns, while the S&P dropped 52%.

The iPad currently resides in my study, still broken. The rest of the family think it’s my fault, since I decided to be a cheapskate on the insurance policy and therefore I should pay for the repairs. My wife has sided with the kids in this, and as long as I claim that repairing the thing is too expensive, I can’t buy any toys myself without being declared morally bankrupt. The larger, extended family has started to get involved as well, and even my father, a shining beacon of frugality himself, has started lecturing me on “opportunity costs”. Imagine the commotion if the livelihood of a few thousand pensioners was at stake, and not just an old iPad.

I wish I could feel so confident in full insurance, I wish I could feel so confident in fully diversified strategies!

Last week we saw currency strategies ruined by an unexpected event, the Swiss Bank floated its currency and many traders lost their shirts (including the sponsors of West Ham United). We’ve yet to hear how this impacted on diversified pension funds. When I was selling diversification 7 years ago, I believed there wasn’t a stress that I couldn’t test and that my fund could survive whatever.

It just about survived 2008 but it certainly lost a lot of its value. The various strategies all failed at the same time- diversification converged to a single failing strategy and my clients were upset with the fund, with me and with themselves for falling for market theory.

There was of course a remedy for the shortfall in the pension fund. It was not to invest the lot on the 3.30 at Doncaster but to carry on pumping money into the pension fund deficit from the profits of the companies who sponsored the pension funds.

Jeroen will not get his laptop mended by means of insurance, he will have to go out to work and earn the cost of a new screen. Of course Jeroen does work and can afford a new screen and I know that I’m sounding a little Tebbit-esque.

Many people can’t work, can’t because they are unable (not unwilling).

Many pension schemes can’t recover through employer sponsorship because the employer is no longer there.

For the pension schemes there is the PPF and reduced expectations for members, for those who are unable to work there is a reduced expectation in retirement. There is no deus ex machina that will magic the money back and there is nothing that those people could have done to prevent them getting sick or having to care for sick people or being somewhere there is no work or working for a company that promised and couldn’t deliver on the pension.

Those of us lucky enough to be in work, now is the time to save. If we trust in the markets to make us rich, we have no plan B.

Where Jeroen and I differ, is that he believes his market solutions will protect people like me. I don’t trust his market solutions, I only trust my dictum that when all else fails- I’ll keep on working.

And I should finish by congratulating Jeroen on a marvellous story and reminding myself that he’s a hard working guy!

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to When all else fails – keep on working!

  1. Andy Heath says:

    From someone else who had already adopted the keep-on-working of you can, and deferring pensions while they hopefully get a little bigger with less time to pay out, I particluarly love the ‘opportunity cost’ argument – ie ‘How much will your pension have to grow, and then how many years will it take before you get that money back?’

    I’m taking the point of view ‘How much will it cost me to give up work five years before I have to (assuming I stay reasonably fit)?’ And, ‘How much more easily will my otherwise not-very-adequate pension pot cover my later retirement needs?’

    Of course, deferred gratification is not so popular with the Me Now generation!

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