The 100 Year Life (and how to afford it)

We have been inspired by a recent podcast series from Baillie Gifford (Episode 14 here) to read Andrew Scott and Lynda Gratton’s bestselling book; The 100-Year Life – Living and Working in an Age of Longevity. If you have not read it, or given it to your children or grandchildren, we would strongly recommend that you do.

The premise of the book is that a child born today in the developed world has at least a 50 per cent chance of living to the age of 105. This will mean that careers, traditionally built around a three-stage life of education, work and retirement will become a thing of the past. It will be replaced by a multi-stage life of many different careers, with periods of re-education, re-skilling and time off.

A longer life alongside a better work/life balance will mean that we will need to think differently about how we plan our finances and how we invest. 

The sheer cost of a population living longer has already prompted corporations and governments to end the generous pension contributions enjoyed by previous generations. Gone are the defined benefit, final salary schemes offered by employers. Concurrently, governments are extending the age of retirement and reducing the extent of the state pension. The onus is now firmly on the individual to provide for his or her own retirement, and they will need help devising a financial strategy to cope for this longer life.

The other inescapable truth is that we will need to work longer and save more. We also need to look carefully at how we invest our savings. We need to invest smarter and invest earlier.

We must ensure that portfolios are populated not with the declining industries of the past but with the industries of the future. In the 1920s the average life of a quoted US company was sixty-seven years. By 2013 this average had been reduced to fifteen years. In equities we will need to invest in tomorrow’s winners early, preferably prior to a public listing, and hold tight to these companies for the duration of their rapid growth phases.

Investors have already begun to realise that they will have to look to equities for decent returns; but they will also have to accept that with equities, you get volatility. History shows that steep market falls are occurring more often and are greater in their amplitude. But history also shows recoveries to new highs have so far followed every market set-back. Even in periods during the 60’s and 70’s when the index went nowhere there were individual stocks that did extremely well.  In a 100-year life one cannot afford to invest in the index or in the bulk of the companies contained in those indices.  Academic research show that most equities deliver returns no better than the US 10-Year Treasury. We need to assiduously avoid these companies and make sure our efforts are directed at finding the handful of companies that provide those outsized market returns.

S&P Index, 90 year chart

Timing markets is impossible, it is time in the market that investors need to benefit from Einstein’s eighth wonder of the world; compounding. The earlier one invests the greater its effect. Investing successfully is a long game and five years should be a minimum time period to commit to equities. A correction in this time is statistically highly likely but we have no ability to determine when this will occur. The opportunity cost of waiting for a correction can prove expensive if the bottom of the next correction is above where the market is today. A well-constructed portfolio should contain assets uncorrelated to equities. These should provide some stability and source of funds when a correction occurs.  It is vital that such assets are liquid enough to sell at times of market turmoil when opportunities to allocate more to equities (risk), are abundant.  

We cannot spot market tops, but market bottoms are easier to identify because they are short and sharp. Private investors unfortunately have a terrible track record of reacting to volatility. Selling at the bottom of market corrections and buying near their tops. It is the old story of fear and greed and how human emotions are an investor’s worst enemy. Equities are one of the only things that people feel comfortable buying when they get expensive and sell them when they get cheaper.

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People need help both from themselves and expensive charlatans extracting high fees. What is needed is a very well thought out, simple plan where transactions are minimised, and management costs are low. Our current guiding philosophy at Hamilton Financial is a portfolio populated by 15 or so actively managed UK listed Investment Trusts to meet these demands.

People need advice; this is a complicated area and calls for a high level of knowledge and experience. It is unfortunate that the FCA – our regulator – equates volatility directly to risk. As practitioners we have to spend a lot of time explaining the difference to clients. In order to meet the demands of the 100-year life we have to learn to embrace volatility, play it to our advantage and add to it on downdrafts.

We will also need to consider a different approach to income generation when the time comes to draw on our savings. Thanks to collapsing sovereign bond yields, the traditional means of generating risk free income has vanished. Alternatives income sources now include infrastructure assets, alternative green energy assets, certain property assets and some areas of the fixed interest market.  This is a complex area to invest in and needs very careful research; the dangers implicit in investing in high yielding assets cannot be exaggerated in a zero-interest world.

We are in the midst of an extraordinary transition that few of us are prepared for. If we get it right, it will be a real gift; failure to prepare will be a curse.

Simon Milne, February 2021

Investment Director

Hamilton Financial

Financial Advice | Investment Management

DISCLAIMER:

The information contained in this document is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The value of investments can fall as well as rise. You may not get back what you invest.