What is wealth – money, choices…something else?
For most of us, we’ll have to engage with some sort of investing, if we want wealth.
Investing approaches gambling for some though, especially for those pushing forward with no risk management strategy. We think diversification covers a multitude of sins but it doesn’t. It’s only a small part of it. And it’s only the part that applies to financial wealth anyway. And if we’re just doing that, well for a start, that’s really one-dimensional isn’t it? What about health? What about relationships? Maybe a bit of fun? Can we optimize for these at the same time when investing?
Heck yes I say!
I may have lost a few of you already (on account of the ‘I’ word), but if you and someone else have a mortgage together, think about this: If you’d be fine financially if they dropped dead, but they’d be on the streets without you? I’d get that sorted.
If you can, get some life insurance at the very least. Maybe you can’t get it because of poor health? Or maybe it’s just well beyond your reach financially. There’s genuine excuses, but really, we need to consider this: Risk management is investing. Without it, you’re gambling.
How can you benefit from what you’re growing unless you’re protecting it?
Life insurance cancels intergenerational poverty by ensuring there’s a hedge in time of need. If you’re the one the household depends on, sort your life out. It’s a bit more urgent than it was before.
Here’s the reason why, from the perspective of an everyday investor.
In the new world, chance are, we’ll need to invest in higher risk assets.
That’s the first prediction and here’s the next one: The middle class portion of your portfolio will come under amazing pressure to produce average returns (assuming a return to lower interest rates, with higher rates of inflation, and lower economic growth (aka ‘stagflation’). So now you can throw in there some demographics, geo-politics, and a financial system under stress. You can start to see the makings of a bit of a storm. I’m not the only one to point this mess out I know, but wait, it’s not all bad: In fact, I think, it’ll get back to normal at some stage. It’ll get worse yes, but then it get’s better.
So, if you really want an above average return, for a world that looks a little more expensive, here’s the script: Invest in shares, property, business, start ups and crypto.
Let’s take this a bit further.
The new world may be more expensive than what we know today, but before you stab yourself in the eye with a rusty fork – stop! This is actually great news for those still accumulating.
If you need a higher than average return from your investments though, you’ll need to invest in riskier assets (or use higher rates of leverage (mortgage-debt)). You need a healthy appetite for risk yes, but you also need a long investment timeframe (10 years would be the absolute minimum). It’s going to race up and down like a Yo-Yo – You need to ‘hang on tight’, during all sorts of market volatility. You need to hang on tight during personal volatility also. Death, Divorce, Disablement? If your higher risk investments are currently caught in a poor market, you don’t want to sell right?
So what if you got cancer, lost your job, or needed medical treatment? What if your partner dropped dead?
So we need to invest in higher risk investments for longer periods of time to achieve better than average returns – and we cannot afford to sell at a loss.
Here’s where insurance fits in: It’s a portfolio diversifier that produces a payout, if there’s an event that has nothing at all to do with market conditions.
Life insurance in the context of an investor is simple – it’s an offset to the mess caused when life happens, SO THAT, you don’t have to liquidate your high risk investments during the worst possible time.
Gold stars all around!
If you manage to get a 7% per annum return on all your investments, on average for 10 years, you’ll roughly double your money. That’s pretty good.
Here’s what else we know though.
If you’re going to die suddenly and unexpectedly, this is only 6% of all deaths that happen annually in New Zealand.
(NZ Ministry of Health, 2021)
So this means: There’s a 94% chance if you die, you’re going to die slowly
The average distance between the diagnosis of cancer and death, is 5.8 years.
(MacMillian Institute Cancer Research, 2009).
Rolling that all up, if you get cancer and die in 6 years, you may cause a financial loss that takes longer than one generation to recover from. If you’re signing up to the promise of compounding returns without a risk management strategy, that’s a massive attack vector on your wealth.
If you haven’t reviewed your own insurance situation for over a year, especially in light of the increased premiums we’ve recently seen, I’d suggest you reach out to your adviser to get a review. Please reach out to Carley here (the host of this episode) by clicking on this link.
Every insurance company is unique in what they’re doing to innovate – In this episode Sam Tremethick, from AIA NZ, discusses a little around a program called Vitality – I won’t give it away, but I find it interesting how here we have an insurer willing to provide a pathway for lower insurance costs if you present with lower risks. It’s not the first time this has been attempted with insurance – but in this space, and in this way, it’s pretty cool.