Advice To My Children

“If you were advising your twenty-something children about investing in a pension, where would you advise them to invest?”

This is the conundrum that greeted me as I attended a Long Finance Roundtable recently (see http://www.zyen.com/long-finance.html). It is, actually, a really interesting question because it forces us to look again at many of our beliefs about the long term. I have been thinking about how to answer the question for a while now and I am not sure that I have a definitive answer. What we can do is start to examine some of the parameters.

Two key questions around this issue are: for how long will your retirement fund have to support you? And, how long do you think that you will save for your retirement? The first question gets at our attitudes towards how long we think that we will live. This is a delicate balance. One the one hand, life expectations are increasing and my daughters (both born in the 1990s) could reasonably expect to see a turn of the century twice – once at the beginning of their lives (the year 2000) and once towards the end of their lives (at the year 2100). On the other hand, there is the possibility of a long term event, such as climate change, significantly reducing life expectations later in this century. There is a great deal of uncertainty about our prospective life spans.

The second question looks at our attitudes towards work, our ideas of career, and the notion that, towards the end of our working lives, we can expect a period of rest. Our traditional view towards work and retirement stems from an industrial view of the workplace. If the knowledge economy establishes itself for our heirs, then one can question if ‘retirement’ is that desirable in the first place. The second question is not independent from the first, because, if we only partially accept the concept of retirement, then the retirement fund will have less strain placed upon it during our sunset years.

When first considering the problem, we are naturally led to start thinking of asset classes (stocks, bonds, property, and so on). However, this is a mistake. Our first focus ought to be on returns, and, from there, we should move on to asset classes. If we do this, then our first thoughts naturally go towards those investments that yield the greatest returns. I am of the opinion that we too often neglect our human capital, and that this is exactly the type of question in which it ought to be considered. Investment in our own education has to be the first port of call. Of course, our education is a wasting asset in that our knowledge will become obsolescent with time – some would say that the rate of obsolescence is increasing – so that, in order to stay current, we need to invest in life long learning.

Beyond that lies the social capital that we can access. Investing in our family and friends, over the course of a life time, will pay dividends many times over. We can enhance these returns by investing in our social networks. Interestingly enough, this investment is primarily non-financial. It is temporal. We need to make time for our family and friends to develop our stock of social capital. In recent years, however, I have been involved in a number of attempts to place a financial valuation upon the social networks embodied within an organisation. I see this as an attempt, in the Knowledge Economy, to leverage the valuation of what really creates financial value – our ‘know how’.

At this point we start to get into the world of financial assets. There is a long discussion about whether financial instruments are better stores of wealth than tangible assets such as property. Much depends upon how well you understand how the different classes of assets work, which basis periods you are comparing, and what else is happening in the wider world when the comparisons are made. Personally, I take the view that a portfolio ought to be balanced with a bit of all of the main investment classes. However, I accept that many people disagree with me.

To come back to the original problem, I think that I would be inclined to advise my children to invest in their own human capital as a matter of priority. Beyond that, the next investment priority would be to invest in their social capital – building strong ties with family and friends. Finally, to start building a stash of financial assets. This last task will be that much easier if they have done the first two tasks effectively.

I am reminded of an old adage – remember your friends on the way up because you will need them on the way down!

© The European Futures Observatory 2010