The Financial Concepts

Climate Change will change everything

Arguably the single biggest issue that will swamp all other investment-related issues over the next 100 years, is climate change. This will happen not only through the massive change in asset values that irreversible climate change will bring (think property, agriculture, fossil fuel and energy industries) but also through huge investments into bold attempts to arrest and reverse the causes of climate change (climate mitigation), as well as investments to adapt to the effects on where we live, what we eat and drink and how we feel (climate adaption). Kelp farming is just one of many avenues that will require consideration on this journey.

Sustainable investing

Sustainable investment requires investing in such a way that the needs of the present are met without compromising the ability of future generations to meet their own needs. Globally, there has been a welcome shift away from investment returns at all costs towards one that contemplates all manner of environmental, social and governance (ESG) issues inherent in any investment decision. What we realise though, is that this analysis involves navigating a complex web of competing outcomes many of which may require compromise or adaption. In Undercurrency we explore some of this complexity through the simplicity of a love story in a beautiful setting.

Are our children our greatest investment?

Education is an investment in human capital. Higher levels of education increase the chance of earning a comparable wage and reduce the time required to find employment. Many people globally believe that saving for education is more important than saving for retirement. For parents, a lack of decent education for their children has direct financial implications – unemployed children depend on you for longer, possibly well into your retirement. This is certainly not part of anyone’s retirement plan so it could be argued that ensuring your child has a good education, and therefore making them employable, is in many ways part of a holistic retirement strategy

Who should provide education and who pays?

Although governments have traditionally been responsible for education, the rising cost of education has taken larger portions of their budgets over the years. Education should be seen as a public good, but the need to fill in the gap left in public education has led to a global increase in for-profit educational institutions at all levels from primary to tertiary. While not all for-profit institutions are bad actors, the sector is rife with predatory and fraudulent practices, making it easier for unscrupulous education corporations to take advantage of students. Predatory for-profits tend to go after potential students who are disadvantaged or have less economic security.

The costs of education can be very high, and often parents or students need to take out loans to pay the full cost of education. It is important to carefully consider how the money received is used, as mismanaged money could have a profound impact on your life. It is a sad fact when you consider that many students are financially inexperienced, and many take out more money than they need. It’s important to match your loan to your expenses and borrow as little as possible.

Investing, speculating and gambling are not the same thing

Understanding what you are doing in each of these instances is possibly best explained by a brief look at the etymology of these words. The origin of the word ‘invest’ was to clothe or wrap, ‘speculate’ was to observe from a vantage point and ‘gamble’ was to play games. In the long term it turns out that clothing and protecting your money is the best idea. On the other hand throwing your money at something you observe or playing games with it could provide short-term gains or enjoyment. But what happens when repeated short-term actions become the long term?

What does it mean to retire?

We live in a world where our average life span continues to increase through medical advances and technology. It’s a world where the paternalistic corporation is a thing of the past and predefined benefits for reaching retirement age are being phased out. “It’s a place where we shift further into the gig economy”, where we are on our own figuring out how to keep the show on the road when the gigs run out. The whole concept of retirement may need to be revisited as the option of not retiring, potentially ever, becomes increasingly feasible. We’ve come full circle – ‘retire’ originally meant to withdraw or retreat, but surely not forever? Like a pit stop in a long car race, a future retire could well be, excuse the pun, a retyre?

Inflation bites

The value of what money can buy changes. So important is this concept to our world of country states that presidents have retired sick after trying to revive it or have died peacefully only after having achieved its maximum, twice. Its presence makes investing in real assets like property and companies (particularly those with pricing power), a must. Its absence usually results in debt being cheap and potentially dangerous if left unchecked. If it’s this serious, it surely can’t be something you gamble on?

Debt slavery

Debt is a powerful hinderance to individuals realising their full economic potential, let alone their investment potential. It’s a challenge that is often borne of an unequal social construct, rather than frivolous spending behaviour. This drives hard decisions, that can be linked to our culture, our family and even our race.

Debt bondage, where work exchanged for a debt that, ultimately, can never be paid, has also been called out as one of the most prevalent forms of modern slavery in all regions of the world, despite being banned in international law.

This system is a fundamental evil for the long-term financial prospects of people caught in its trap. There are no investment opportunities for them; and no way for them to protect their future, let alone that of their children.

Universal health coverage

The goal of universal health coverage (UHC) is to ensure that all people obtain the health services they need without suffering financial hardship when paying for them. It’s a concept that’s important enough that the United Nations unanimously endorsed it as a pillar of sustainable development and global security.

Each year one billion people cannot afford a doctor, cannot pay for medicine or cannot access other essential care without risking impoverishment. UHC offers protection to not only these people, but everyone in a nation. In doing so, it lays the foundations for good health across the board for a country. This, at face value, is a nice to have. But it’s actually fundamental to the success of a nation. After all good health is essential to sustaining economic and social development as well as poverty reduction.

Longevity and the spectre of retiring at 80

There have been incredible advancements in longevity technology and medicine over the last decade. This has resulted in many predictions that, in the near future, many of us will be comfortably living to 115 years old.

This will have major implications on the way we work and how long we work for. If we keep the retirement age the same, the money we retire with at 65 might have to last up to 30 years longer than it currently needs to. The obvious path is to increase the retirement age to 80. However, retirement also creates space for new entrants into the workforce. And with the advent of the Fourth Industrial Revolution (4IR), jobs might be ever sparser, and people may actually need to retire earlier to make space for younger workers.

This is a contentious topic with strong counter arguments. But whichever way you look at it, how our retirement age and our pensions are approached needs to be thoroughly explored. Because with the current system, there is a strong chance we’ll outlive our retirement savings by somewhere between 8-20 years. And then what we might need is less reliance on retirement savings, and more social capital where communities are shaped around looking after aging parents long into the future.

Do we really want robo-advice?

All financial projections are predicated on models and algorithms. But as an increasing number of companies around the world replace human advisors with robo-advisors that build automated financial plans for people, we must question what we lose if humans are removed from the system? How do you argue with an algorithm? And will your investment plan be able to accommodate changing priorities?

Artificial Intelligence (AI) uses data to determine decisions and actions. But data alone is not sufficient. An investment strategy is personal and reflects the investor’s appetite for risk, aspirations for retirement age, dreams for children and other loved ones, and even religious and environmental views. These can be data points, but the combination of these human subtleties could be lost in the machine. When the move from human advice to AI decision-making happens, investors may no longer be able to determine their own futures.

Good for some, but not all

Managing your own money is complicated. Most people don’t save enough for retirement. Most people don’t think enough about their future financial goals. There’s something appealing about a system that forces you to save, and be responsible for your money, so that a future-you will have enough. Provided it can account for changing life circumstances and shifting life goals.

This flexibility to change investment strategies according to life events is paramount, whether they are planned or unplanned events. Investors should ensure that they are not committed too deeply, as markets and life are not 100% predictable and room to move may be required.

Universal basic income

What if governments paid their citizens a basic level of income regardless of their means or employment status? Universal basic income (UBI) has and is being tested in places as varied as India and Canada. It offers the hope of the eradication of child poverty, breaking the cycle of dependency for the disadvantaged, education for those who can’t afford it and a burgeoning middle class to drive more economic activity. Its detractors see it as too expensive for most countries to afford, a nightmare to administer, a honeypot for corruption or an excuse for citizens to ‘get lazy’.

More recently, the COVID-19 pandemic sparked a resurgence in interest and a number of programmes have been implemented most notably in parts of the US and in Spain. But these are shortterm knee jerk responses. In the longer term the rise of robotics and technology raise the spectre of higher unemployment and poverty. Could UBI provide a solution?